DBRS Confirms Gateway Casinos & Entertainment Limited at B (high), Stable

DBRS Limited (DBRS) has today confirmed both the Issuer Rating and Senior Secured 2nd-Lien Notes rating of Gateway Casinos & Entertainment Limited (Gateway or the Company) at B (high) with Stable trends. The Senior Secured 2nd-Lien Notes have a recovery rating of RR4. The confirmation considers Gateway’s steadily improving operating performance and the mainly debt-financed acquisition of Playtime Gaming Inc. (Playtime).

In the first nine months of 2015 (9M 2015), Gateway’s revenues increased in the low-double digits, driven by a full-year contribution of the expanded Grand Villa casino and the increased restaurant offerings in many of its locations. EBITDA margins remained stable and high relative to peers as the benefit of operating leverage offset the impact of increased marketing and promotion. As a result, EBITDA increased by approximately 12% year over year in 9M 2015. Cash flow from operations continued to track operating income and expansionary capital expenditures increased in the last year, mainly to fund the expansion/renovation of the Kamloops casino. As such, Gateway’s free cash flow before changes in working capital increased modestly to the $20 million range for the last 12 months ended Q3 2015.

In Q4 2015, Gateway closed the acquisition of Playtime, adding six new properties in four new markets in British Columbia. While the purchase price was not disclosed, the acquisition was partially financed by an additional $50 million of borrowings under Term Loan A and by increasing the Company’s revolving credit facility by $10 million. Credit metrics improved marginally over the last year as the benefit of increased earnings outweighed the increased debt level resulting from the Playtime acquisition. DBRS estimates that pro forma lease-adjusted debt-to-EBITDAR and lease-adjusted EBITDAR coverage were 5.7 times (x) and 2.4x, respectively, compared with 6.0x and 2.3x, respectively, at the end of 2014.

DBRS believes that Gateway’s earnings profile will strengthen over the near to medium term as investments continue to increase customer traffic and improve geographic diversification. DBRS believes that gaming revenue will grow in the low-double digits over the next two years, driven by a full-year contribution of the relocated and expanded Kamloops casino, the relocation and expansion of the Baccarat and the Palace casinos in Edmonton as well as the contribution of Playtime. The Edmonton casinos will move to much higher-traffic locations in the new Ice District and in the West Edmonton Mall and could be opened in Q3 2016 and Q4 2016, respectively. The softened economic conditions in Alberta could have a minor impact on customer traffic and revenue growth. As a result, DBRS expects EBITDA to grow in the double digits in both 2016 and 2017.

DBRS expects Gateway’s financial profile to improve over the medium term as the Company increases its cash-generating capacity and makes its scheduled debt repayments. Cash flow from operations is expected to grow in the double digits, increasing to approximately $85 million in 2016. DBRS expects Gateway to invest $85 million in 2016, mainly to fund the Edmonton casinos’ relocations and expansions. Gateway has approximately $22 million of scheduled amortization payments to be made in 2016. In order to fund the cash flow deficit, DBRS believes that the Company will divest some of its land holdings. While DBRS expects the Company to meet its liquidity requirements in 2016, should Gateway have the need to conserve capital, it could slow down spending at the Palace casino relocation. DBRS expects Gateway to return to generating positive free cash flow in 2017. The growth in operating income combined with the scheduled debt repayment should result in a material improvement to key credit metrics (i.e., lease-adjusted debt-to-EBITDAR comfortably below 5.5x by 2016). A positive rating action could ensue if lease-adjusted debt-to-EBITDAR nears 5.0x. That said, if lease-adjusted debt-to-EBITDAR increases to more than 6.5x because of weakening operating performance and/or debt-financed growth, the ratings could be pressured.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodologies are DBRS Criteria: DBRS Recovery Ratings for Non-Investment Grade Corporate Issuers (February 2015) and Rating Companies in the Gaming Industry (November 2015), which can be found on our website under Methodologies.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.