DBRS Confirms River Cree Enterprises Limited Partnership at BB (low) and B (high), Stable

DBRS Limited (DBRS) has today confirmed the Issuer Rating and the Senior Secured 2nd-Lien Notes (the Notes) rating of River Cree Enterprises Limited Partnership (River Cree or the Company) at BB (low) and B (high), respectively. All trends are Stable. The Notes have a recovery rating of RR5. The confirmation is based on the Company’s stable operating performance in a challenging macroeconomic environment. The ratings continue to reflect River Cree’s single asset and market concentration risk as well as significant benefits from the Company’s First Nations status and its leading market position.

Adjusted revenue grew by 6.9% year over year as River Cree continued to outperform other casinos in the Greater Edmonton Area. The Company’s market share in slot machines increased to 33.0% in the first nine months of 2016 (9M 2016) from 31.7% a year ago. Revenue increases were driven by the Company’s successful promotional strategy. Adjusted EBITDA margins weakened to 41.0% in 9M 2016 because of promotional offerings at the casino and on complementary goods and services (including food, beverages and hotel rooms). River Cree’s adjusted EBITDA, which includes First Nations Development Fund (FNDF) proceeds, was $53 million for the last 12 months (LTM) ended September 30, 2016, from $52 million in 2015. FNDF proceeds have been more than sufficient to fund 90% (the maximum allowable percentage) of the Company’s debt service requirements on its term loan and notes. River Cree has used its cash and free cash flow to fund the remaining amortization payments. Gross debt-to-EBITDA and EBITDA coverage have remained stable at 4.46 times (x) and 2.19x, respectively, for the LTM ended Q3 2016 from 4.49x and 2.17x, respectively, in 2015. Subsequent to Q3 2016, the Company applied $4.5 million received from an arbitration settlement with Paragon Gaming Inc. (Paragon) toward debt reduction.

DBRS expects that River Cree’s earnings profile will remain appropriate for the current rating category over the near to medium term as the Company maintains its leading market share. Despite the softened economic conditions in Alberta, DBRS forecasts revenue to increase in the low-single digits through 2017 based on increasing customer traffic from ongoing promotional activities. DBRS believes that margins will remain relatively stable and, as such, DBRS expects adjusted EBITDA to grow in the low-single digits to approximately $55 million in 2017.

DBRS expects River Cree’s financial profile to remain stable over the medium term as the Company modestly increases its cash-generating capacity and uses FNDF proceeds to fund 90% of debt service on its term loan and notes, including scheduled repayments. DBRS forecasts that operating EBITDA will be approximately $7.0 million in 2017, more than sufficient to fund the $1.0 million of maintenance capital expenditures not covered by the FNDF proceeds and the remaining 10% of debt service requirements of approximately $3.0 million. As such, DBRS believes that surplus operating EBITDA will amount to $3.0 million in 2017. As a result of the scheduled amortization payments, DBRS expects key credit metrics to improve slightly and to remain well placed within the current rating category.

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.

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

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

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.