DBRS Assigns Provisional Ratings to River Cree Enterprises Limited Partnership

DBRS has today assigned a provisional Issuer Rating of BB (low) to River Cree Enterprises Limited Partnership (River Cree or the Company) and a provisional rating of B (high) to the Company’s proposed new Senior Secured 2nd-Lien Notes, both with Stable trends. The Senior Secured 2nd-Lien Notes have a recovery rating of RR5. The ratings reflect the Company’s single asset and market concentration risk and also consider the highly competitive Edmonton market and the less-certain creditor rights due to Enoch Cree Nation’s First Nations status. The ratings are also based on the significant benefits from the Company’s First Nations status, River Cree’s strong market position in a fast growing market and the symbiotic relationship with the government that is beneficial to incumbent casino operators.

The River Cree Resort and Casino (the Casino) is a premium-quality asset with the leading market position in Edmonton. The Enoch Cree Nation is a sovereign government occupying the land on which the property lies. The facility was built in 2006 for $184 million in a 55%/45% joint venture between Enoch Cree Nation and Paragon Gaming (Paragon). The facility is the largest resort and casino in Alberta, boasting 62,000 square feet of casino space, a four-star hotel/conference centre, bars and restaurants, a sports complex and a 1,700 seat entertainment centre.

As a result of the owner’s First Nations status, the Casino benefits from certain competitive advantages. Firstly, it is the only Edmonton casino to allow indoor smoking in certain areas. Slot machines in smoking areas generate approximately four times the revenue of machines in non-smoking areas. Secondly, as part of the government allocation agreements, First Nations’ host casinos receive 45% of slot revenues, three times the amount of a non-First Nations operator. DBRS notes that the additional 30% in slot revenues is classified as First Nations Development Fund (FNDF) proceeds.

Since opening the resort and casino, the Company has consistently increased its market share. Adjusted revenue has grown from $96 million in 2008 to nearly $118 million in 2012, primarily driven by an increase in the number of slot machines and growing customer traffic. The high operating leverage inherent in the industry has enabled the Company to grow its leading adjusted EBITDA margins to approximately 48% for the last 12 months (LTM) ended September 30, 2013, from 37% in 2008. As such, adjusted EBITDA has grown by 44% since 2008 to $57 million for the LTM ended September 30, 2013.

River Cree’s financial profile is well placed in its current rating category and benefits from steadily increasing cash flow generation, tax exemption and minimal capex requirements. Cash dividends, although modest, have varied in the past depending on the Company’s operating performance as well as the discretion of shareholders. DBRS notes that proceeds from the FNDF have been more than sufficient to fund 79% (the maximum allowable historically) of the Company’s annual debt service requirements.

River Cree is planning to raise $245 million of debt -- $45 million through an amortizing term loan and $200 million through a senior secured notes offering. The majority of the issuance proceeds will be used to purchase Paragon’s 45% minority interest in the Company for approximately $138.8 million and to refinance $90.3 million of existing bank debt. Upon the closing of the transaction, DBRS expects the Company’s debt-to-EBITDA ratio to stand at 4.2 times (x).

DBRS expects River Cree’s earnings profile to remain steady over the near-to-medium term as the Company maintains its leading market share and revenue/earnings growth moderates. DBRS forecasts revenues to increase by 2% to 3% to approximately $135 million in 2015 based on growing customer traffic. DBRS believes margins will improve slightly due to the benefits of operating leverage. As such, DBRS expects EBITDA to grow in the mid-single digits to more than $60 million by 2015.

DBRS expects River Cree’s financial profile to improve over the medium term as the Company modestly increases its cash generating capacity and FNDF proceeds are more than sufficient to fund 90% of debt service, including scheduled repayments. DBRS notes that operating cash flow is derived from both FNDF proceeds and operating EBITDA.

Over the next three years, DBRS expects FNDF proceeds to grow modestly and average $50 million annually. The FNDF proceeds will be used to fund, in priority order, approximately 90% of debt service ($22 million to $25 million), certain operating expenses and non-gaming capex (approximately $4 million). All residual FNDF funds, estimated at more than $20 million per year, will be distributed to the Enoch Cree Nation Business Trust for community and economic development projects.

Over the next three years, DBRS estimates that operating EBITDA will grow modestly from $10 million in 2013 to $11 million in 2015. Following maintenance capex and debt service not covered by FNDF proceeds, DBRS expects surplus operating EBITDA will amount to $6 million to $8 million per year through 2015. DBRS believes River Cree will distribute in the range of $3 million to $6 million per year, the full amount permitted under its debt incurrence tests. As a result, DBRS expects key credit metrics to improve and remain well placed within the current rating category (i.e., gross debt-to-EBITDA below 4.0x by 2015).

DBRS’s revenue and earnings forecasts could improve if the Company were to utilize its delayed draw term loan toward property expansions. Although the increased debt would weaken credit metrics, DBRS does not expect such an action to result in pressure on the ratings. DBRS notes that surplus FNDF proceeds could comfortably cover both interest and principal repayments on the delayed draw term loan, with limited impact on the Company’s liquidity.

DBRS will finalize its provisional ratings following the creation of an organizational structure as currently intended and the completion of the financing under terms consistent with those currently proposed.

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 methodology is Rating Companies in the Gaming Industry, which can be found on our website under Methodologies.

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