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MOODY’S REPORT: del Lago will need ‘substantial’ revenue growth to pay debt

Moody’s Investor Services downgraded del Lago Resort and Casino’s Corporate Family Rating after a scathing report was released.

The rating dropped to Caa2 from B3 while the company’s Probability of Default Rating was lowered to Caa2-PD from B3-PD.

At the same time, Lago’s 1st lien revolver and term loan were downgraded to Caa1 from B2, and its 2nd lien term loan was downgraded to Caa3 from Caa2. The rating outlook is negative.

“Despite the fact that del Lago Resort Casino opened on time and on budget and has substantially grown total gaming revenues generated in its primary market area, the property’s revenue ramp-up is well below Moody’s expectations,” stated Keith Foley, a Senior Vice President at Moody’s.

At the time of the initial rating, Moody’s expected that del Lago would ramp up to about $250 million of net revenue in its first full year of operations. The casino, which opened about 9 months ago, has consistently reported gross gaming revenue of about $12.5 million per month. At this rate, del Lago’s gross gaming revenue will only hit about $150 million; less than that on a net revenue basis once promotional allowances are considered. Additionally, the company’s debt/EBITDA will be well above our stated 6.0 times debt/EBITDA downgrade trigger. While liquidity is weak, Moody’s estimates del Lago can cover interest expense at its current operating levels.

“Given del Lago’s current performance, Moody’s is of the view that without a substantial improvement in revenue, del Lago will not be able to achieve a level of performance that can support its existing debt capital structure,” added Foley.

Lago owns and operates del Lago Resort Casino, a $440 million resort and casino development located in Tyre, NY, between the cities of Rochester and Syracuse and about 50 miles from each. Lago is a joint venture between Wilmot Gaming, LLC and PGP Investors, LLC and is managed by JNB Gaming, LLC.

Downgrades:

Issuer: Lago Resort & Casino, LLC

– Probability of Default Rating, Downgraded to Caa2-PD from B3-PD

– Corporate Family Rating, Downgraded to Caa2 from B3

– Senior Secured First Lien Bank Credit Facility, Downgraded to Caa1(LGD3) from B2(LGD3)

– Senior Secured Second Lien Bank Credit Facility, Downgraded to Caa3(LGD5) from Caa2(LGD5)

Outlook Actions:

Issuer: Lago Resort & Casino, LLC

– Outlook, Changed To Negative From Stable

RATINGS RATIONALE

Key credit challenges include Lago’s slower than expected ramp up, single asset profile, and the highly competitive nature of the market which it operates that may impede the company’s ability to support its capital structure. There are five gambling facilities, including four racinos and one Native American full scale casino within 100 miles of del Lago’s location.

Positive rating consideration is given to del Lago’s position as the only full scale casino accessible by the populous cities of Rochester and Syracuse, its ability to offer live table games which are not available at nearby racinos, and its favorable tax rate. The closest full scale casino to del Lago is the Oneida Indian Nation’s Turning Stone Resort Casino (unrated) located in Verona, New York — about 75 miles east of del Lago. However, while located further away from del Lago than Turning Stone, we consider the Oneida Nation casino to be a direct competitor to Lago in that it markets aggressvely to customers in Rochester. Both the Oneida and Seneca tribes also have a more favorable tax regime than del Lago and the racinos.

The negative rating outlook considers Moody’s expectation that, despite the likelihood that Lago’s will cover its cash interest obligations and remain in compliance with its financial covenants during the next 12 months, albeit both marginally, without a substantial improvement in the rate and degree of ramp-up and/or an additional equity investment by the owners, Lago will not be able to achieve a level of performance that can support its existing debt capital structure.

Lagos rating could be lowered if it appears there will be a debt restructuring that involves impairment to existing lenders. A higher rating requires a high degree of confidence on Moody’s part that Lago will be able to maintain its current debt structure through enough of an improvement in its financial performance and/or an equity investment.

The principal methodology used in these ratings was Gaming Industry published in December 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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