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

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Senior Secured 2nd-Lien Notes Rating of Gateway Casinos & Entertainment Limited (Gateway or the Company), both at B (high) with Stable trends. The Senior Secured 2nd-Lien Notes have a recovery rating of RR4. The confirmation considers Gateway’s improving operating performance and steady financial profile since the new management team assumed their roles.

Gateway’s earnings profile remained stable over the last year as the Company’s new management team was able to reverse the trend of market share losses and decreasing operating income. EBITDA increased by approximately 2.0% year over year, following two years of decreases. This was a result of an increase in slot machines at the Company’s flagship Grand Villa casino and the introduction of a new chain of sports pubs in four of its casinos. Free cash flow before dividends decreased slightly as the Company funded casino expansions/renovations, as well as the new sports pubs. Balance sheet debt remained stable and lease-adjusted debt-to-EBITDAR and lease-adjusted EBITDAR coverage improved marginally to 6.0x and 2.6x, from 6.1x and 2.5x, respectively.

DBRS believes Gateway’s earnings profile will strengthen over the near to medium term as investments and initiatives continue to increase customer traffic. DBRS believes gaming revenue will grow in the mid-single-digits over the medium term, driven by a full-year contribution of the expanded Grand Villa casino, the Kamloops casino relocation and the impact of new restaurant offerings. The Kamloops casino relocation is expected in Q3 2015 and could result in an increase of slot machines to 518 from 301 and table games to 20 from five. DBRS forecasts margins will improve slightly, resulting from a continued focus on cost cutting, the benefits of operating leverage and the additional slot machines. As a result, DBRS expects EBITDA to grow in the high-single-digits in 2015.

DBRS expects Gateway’s financial profile to improve over the medium term as the Company increases its cash-generating capacity and uses the majority of its free cash flow to fund scheduled debt repayments. Cash flow from operations is expected to grow in line with operating income, increasing to almost $70 million in 2015. DBRS expects Gateway to invest $40 million to $50 million in 2015 to fund property relocation (Kamloops, Baccarat and the Palace casinos) and expansion. DBRS believes free cash flow will be used for debt reduction, including the Company’s $16 million of scheduled amortization payments in 2015. This debt repayment, combined with growth in operating income, should result in a material improvement to key credit metrics (i.e., lease-adjusted debt-to-EBITDAR below 5.5x by 2015). A positive rating action could ensue should lease-adjusted debt-to-EBITDAR near 5.0x. On the other hand, should lease-adjusted debt-to-EBITDAR increase to more than 6.5x, either resulting from weakening operating performance or debt-financed returns to shareholders, 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 methodology is Rating Companies in the Gaming Industry, which can be found on our web site under Methodologies.