OREANDA-NEWS. Fitch Ratings has upgraded Boyd Gaming Corp.'s (Boyd) Issuer Default Rating (IDR) to 'B+' from 'B' and revised the Rating Outlook to Stable from Positive. In addition, Fitch has assigned a 'BB+/RR1' rating to Boyd's new $1.6 billion senior secured credit facility including $700 million senior secured term loan B-2, $200 million term loan A and $700 million revolver. Fitch also upgraded Boyd's issue ratings, including the existing credit facility to 'BB+/RR1' from 'BB/RR1' and senior unsecured notes to 'B+/RR4' from 'B-/RR5'. The full list of rating actions is at the end of the release.

The credit facility will be guaranteed by substantially all subsidiaries and will be secured by the assets of the subsidiaries. There will be a $550 million accordion option with additional amounts permitted as long as first-lien leverage remains below 4.25x. Only the term loan A and the revolver will be subject to financial maintenance covenants. There is a 50% excess cash flow sweep if leverage is above 5x with the sweep stepping down until leverage declines below 4.5x, when it becomes 0%. The new revolver and term loan A will mature in 2021 and term loan B-2 will mature in 2023. The existing term loan B will remain outstanding and will mature in 2020.

The proceeds from term loan B-2, along with the proceeds from the Borgata sale ($589 million) and the earlier issuance of the 6.375% notes ($739 million), will be used to refinance $960 million of debt at Peninsula, refinance $350 million of Boyd's 9% senior unsecured notes and fund the purchase of Aliante and the Cannery casinos ($610 million excluding working capital adjustments).

KEY CREDIT DRIVERS

Fitch's upgrade of Boyd's IDR to 'B+ reflects the company's sale of its 50% interest in Borgata as well as the pending acquisitions and refinancings. These initiatives together will reduce gross leverage and increase free cash flow (FCF) with Fitch forecasting 2017 leverage at 5.2x, down from 6.1x at year-end 2015, and FCF at $305 million, up from $209 million in 2015. FCF growth is attributable to the acquisition of Aliante and the Cannery casinos, reduced interest cost and same-store operating improvement, especially in the Las Vegas Locals segment.

Fitch also views the merger of Peninsula into Boyd's credit group favorably as it simplifies the capital structure and allows Boyd unencumbered access to Peninsula's FCFs. The upgrade further takes into account Boyd's public leverage target range of 4x-5x, which the company started mentioning earlier this year soon after Fitch revised Boyd's Outlook to Positive. The release of a public target has accelerated the timing of Fitch's upgrade as the prior lack of a target had caused Fitch to take a more cautious approach when considering the 'B+' IDR.

The upgrade recognizes Boyd's aggressive deleveraging efforts with leverage declining from around 9x five years ago. In addition to paying down debt with FCF, Boyd raised equity and sold non-core assets in 2013 and used the proceeds for debt paydown. Boyd adopting a public leverage target and not rushing to execute a REIT transaction further speaks to the company's more conservative financial philosophy. However, the risk of a REIT related transaction or other leveraging M&A remains a risk as BYD has not definitively taken a REIT transaction off the table and has a history of debt funding acquisitions.

Boyd's 'B+' IDR takes into account Boyd's diversified portfolio of assets. Boyd's exposure includes Las Vegas Locals (about 35% of pro forma revenues), Las Vegas Downtown (10%) and U. S. regional markets (55%). Boyd's regional segments' revenue is down 4% year-to-date through June compared to past year with some of the decline attributed to oil-related economic weakness and increased competition in the southern regions. Longer term, Fitch believes regional gaming is a mature sector facing secular headwinds including an unfavorable demographic shift and increasing competition from alternative forms of gambling.

Boyd's liquidity is strong. Following the planned transactions, Boyd will have approximately $450 million available on its upsized revolver and no maturities until 2020, when its $726 million term loan B matures.

REIT RISK

While a REIT transaction remains a possibility for Boyd, Fitch places a slightly lower than 50/50 probability on one occurring. Boyd had almost four years to consider a REIT transaction since Penn National first announced it in November 2012 and two years since Boyd said it was considering a REIT itself. Subsequently, Boyd issued $1.5 billion of senior notes with covenants that tightly restrict asset sales and transfers. The most recent note was issued in March 2016 with a first call date in 2021. The company had $913 million and $653 million of federal and state net operating losses as of Dec. 31, 2016 and is closely held with the Boyd family owning about a quarter of the voting shares. However, the economic rationale for a REIT spin-off or a sale-leaseback remains compelling with Gaming & Leisure Properties (GLPI), a REIT, trading at around 14x forward EBITDA.

Fitch views the gaming operating companies (OpCo) such as Penn National and Pinnacle Entertainment less favorably compared to traditional companies such as Boyd that still retain their assets. Fitch's more negative view of OpCo's reflects the operating leverage inherent in the leases paid to the real property owners such as GLPI. The leases are long-term in nature, are triple-net (meaning OpCo's pay maintenance capex) and are subject to annual escalators. Fitch believes that the cyclical, capital intensive and somewhat secularly challenged regional gaming sector is not well suited for such a lease structure, at least not at below 2x rent coverage levels seen so far (not counting MGM's unique structure).

The last regional company to execute a REIT transaction, Pinnacle, opted to sell its assets to GLPI instead of pursuing its own spin-off. Boyd may opt for a similar transaction, especially in light of the law passed last year making tax-free spin-offs more difficult. Upon the asset sale, Pinnacle refinanced all of its debt with the associated debt breakage costs budgeted at $181 million at the time the deal was announced.

ISSUE RATINGS

Fitch's upgrade of the senior unsecured notes' Recovery Rating (RR) to 'RR4' from 'RR5' reflects the improved recovery prospects from merging the Peninsula assets into Boyd's credit group and the sale of Borgata. Previously, Fitch gave little credit to Boyd's ownership of Peninsula and 50% interest in Borgata given the debt at each entity. The proceeds from the Borgata sale will be used to either reduce debt or fund the purchase of Las Vegas casinos with either use being accretive to senior notes' recovery prospects. The upgrade of the notes' RR further takes into account Boyd's continued use of FCF to reduce its secured debt.

Fitch's recovery analysis assumes about a 20% stress on the latest 12 months (LTM) pro forma EBITDA, which includes $62 million of EBITDA from the newly acquired casinos. The analysis further assumes a 6.6x weighted average EV/EBITDA multiple, 10% for administrative claims and a full draw on Boyd's new $700 million revolver. Fitch expects the notes' recovery prospects to improve as Boyd pays down its terms loans through amortization and excess cash flow sweeps.

KEY ASSUMPTIONS

Fitch's expectations are based on the agency's internally produced, conservative rating case forecasts. They do not represent the forecasts of rated issuers individually or in aggregate. Key Fitch forecast assumptions include:

--Negative 5% revenue growth for regional markets in 2016 and 0% growth thereafter. For Las Vegas segments, 1% growth through the projection horizon.

--Margins remaining largely unchanged except in Las Vegas Locals, where Fitch assumes 28% margin in 2017 and thereafter reflecting the larger scale and revenue flowthrough.

--$62 million EBITDA from Aliante and Cannery assets.

--State and federal NOLs absorb all tax liability through the rating case horizon.

--No dividends or share repurchases and FCF being used to pay down the credit facility.

RATING SENSITIVITIES

Positive: Future developments that may, individually or collectively, lead to positive rating action include:

--Debt/EBITDA declining and remaining below 5x (Fitch forecasts 5.2x for 2017);

--Discretionary run-rate FCF exceeding $300 million on sustained basis (Fitch forecasts $305 million for 2017);

--Regional markets remaining stable or growing on same-store basis.

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

--Boyd's debt/EBITDA ratio remaining above 6x on sustained basis (Fitch forecasts 5.2x for 2017);

--Discretionary run-rate FCF declining towards or below $150 million (Fitch forecasts $305 million for 2017);

--Operating pressure with same-store revenues declining over an extended period;

--Boyd pursuing a REIT spin-off or an M&A activity that would result in rent adjusted leverage to increase.

FULL LIST OF RATINGS

Fitch has taken the following rating actions:

Boyd Gaming Corp.

--IDR upgraded to 'B+' from 'B'; Outlook to Stable from Positive;

--New $1.6 billion senior secured credit facility assigned 'BB+/RR1';

--Existing senior secured credit facility upgraded to 'BB+/RR1' from 'BB/RR1';

--Senior unsecured notes upgraded to 'B+/RR4' from 'B-/RR5'.

Peninsula Gaming, LLC

--IDR upgraded to 'B+' from 'B'; Outlook to Stable from Positive;

--Senior secured credit facility upgraded to 'BB+/RR1' from 'BB/RR1'.

Peninsula Gaming, LLC (Peninsula Gaming Corp. as co-issuer)

--Senior unsecured notes upgraded to 'B/RR5' from 'B-/RR5'.