S&P Global Ratings lowered its issuer credit rating on U.S. gaming operator Affinity Gaming one notch to ‘CCC+’ from ‘B-’. The outlook is developing.
At the same time, S&P is lowering its issue-level rating on the company’s first-lien debt to ‘B-’ from ‘B’ and on its second-lien term loan to ‘CCC-’ from ‘CCC’. S&P also removed all ratings from CreditWatch, where it had placed them with negative implications on March 20, 2020.
The downgrade reflects heightened liquidity risk over the next 12 months if Affinity is unable to refinance or extend the maturity of its revolver. S&P believes Affinity Gaming faces heightened liquidity risk over the next 12 months if the company is unable to refinance or extend the July 2021 maturity of its $75 million revolver.
“It is our understanding the company fully drew the remaining availability on the revolver after the end of the first quarter while its casinos were closed,” S&P said.
Based on its forecast for Affinity’s recovery through the end of 2020 and the first half of 2021, S&P believes Affinity may have sufficient liquidity to repay the revolver balance at maturity. However, S&P believes repaying the revolver would drain excess cash balances and result in continued heightened liquidity risk, particularly if the company were required to close its properties and absorb a cash burn again because of increasing cases of the virus in its markets.
S&P believes Affinity will experience a significant decline in cash flow and a deterioration in its adjusted credit measures in 2020 as a result of the temporary closure of its properties due to the pandemic. Further, S&P does not believe EBITDA will return to pre-COVID-19 levels in 2021 since it expects properties will continue to maintain social distancing measures that may limit customer traffic, particularly during peak hours, and since the rating agency believes customers may have lingering fears around being in enclosed public spaces, especially if virus cases are rising in the region. Further, S&P believes demand may remain soft into 2021 given its forecast for U.S. unemployment to remain elevated through 2021 and the possibility that expanded unemployment benefits may not be extended, which the rating agency believes may translate into lower customer visitation and/or spending per visit. Although S&P believes Affinity, like other gaming operators, is taking a measured approach to increasing labor and marketing expenses as its properties recover, the rating agency believes the company will likely face challenges managing its expense base over the coming quarters due to uncertain and potentially volatile demand.
S&P acknowledges a high degree of uncertainty around the recovery path for Affinity, particularly as various states may relax and re-implement social distancing and other restrictions. S&P’s preliminary forecast for 2021 contemplates revenue and EBITDA to be down in the low- to mid-single-digit percent area, relative to 2019. S&P’s forecast is pro forma to exclude from 2019 assumed revenue and EBITDA related to the Colorado assets that Affinity sold in January 2020 and incorporates the rating agency’s view that 2019′s operating performance was impaired by flooding at some of its Midwest properties.
“We believe there is a heightened risk lenders may not provide covenant relief or that covenant relief could be costly,” S&P said.
We believe the near-term revolver maturity, if it’s not addressed at the same time, may make it more challenging for Affinity to obtain longer-term financial maintenance covenant relief from its lenders on favorable terms and could lead Affinity to engage in some form of debt restructuring. Nevertheless, given the unprecedented cause of the EBITDA decline and anticipated covenant breach, we believe lenders may provide some temporary covenant relief over the next few quarters,” the rating agency said.
Environmental, social, and governance (ESG) credit factors for this credit rating change:
— Health and safety factors
The developing outlook reflects the equal probability that S&P could lower or raise the rating, depending on whether or not Affinity can successfully refinance or extend the July 2021 maturity of its revolver and obtain covenant relief under its credit agreement, as well as how its casinos are recovering following closures earlier this year.
“We could lower ratings further if Affinity were not able to obtain covenant relief or extend the maturity of its revolver, since we believe this would increase the likelihood that Affinity could pursue some form of debt restructuring,” S&P said.
“We could raise the issuer credit rating back to ‘B-’ in the event Affinity obtained covenant relief and extended its revolver maturity, since we expect Affinity would otherwise have sufficient liquidity. In addition, we would also need to believe its casinos were recovering in a manner that would support EBITDA coverage of interest expense improving above 1.5x in 2021,” the rating agency said.