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

DBRS Limited (DBRS) confirmed the Issuer Rating and the Senior Secured 2nd-Lien Notes (the Notes) rating for 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 earnings and financial management. 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 declined by 5.4% in the first nine months ended Q3 F2017 (9M F2017) compared to a strong nine months ended Q3 F2016 as foot traffic at the resort declined primarily because of poor weather conditions in the winter months. The Company’s market share in slot machines remained relatively stable at 32.8% in 9M F2017 compared to 33.0% a year ago. Adjusted EBITDA margins improved to 43.3% in 9M F2017 because of cost cutting efforts. River Cree’s adjusted EBITDA, which includes First Nations Development Fund (FNDF) proceeds, was $54 million for the last 12 months (LTM) ended September 30, 2017. 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 used free cash flow and funds received from the arbitration settlement with Paragon to fund the remaining amortization payments. Gross debt-to-EBITDA and EBITDA coverage improved modestly to 4.20 times (x) and 2.27x, respectively, for the LTM ended Q3 F2017 from 4.27x and 2.23x, respectively, in F2016.

DBRS expects that River Cree’s earnings profile will remain appropriate for the current rating over the near to medium term as the Company should maintain its leading market position. DBRS forecasts revenue to increase in mid-single digits through F2018 and return to F2016 levels should normal weather conditions transpire in F2018. DBRS believes that adjusted EBITDA margins should increase modestly as the benefits of operating leverage will be partially offset by promotional and marketing expenditures related to increased competition from the expected completion of the Palace Casino renovation in 2018. As such, DBRS forecasts adjusted EBITDA to grow in the mid-single digits to approximately $57 million in F2018. DBRS notes that River Cree is currently working on amending its hotel agreement with Marriott with the aim of increasing the flexibility to lower the average daily room rate to drive hotel occupancy and foot traffic at the resort.

DBRS expects River Cree’s financial profile to remain stable over the near to medium term as free cash flow is expected to remain relatively steady and the Company 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 $7.5 million in F2018, more than sufficient to fund the $2.0 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 $2.5 million in F2018. As a result of the scheduled amortization payments, DBRS expects key credit metrics to improve slightly and to remain well placed for the current rating.

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 principal methodology is Rating Companies in the Gaming Industry, which can be found on dbrs.com under Methodologies.

The rated entity or its related entities did participate initially 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