S&P: River Cree Enterprises L. P. CCR Lowered To 'B' From 'B+' On Weakening In Operating Performance; Outlook Is Negative
"The downgrade reflects our expectation of River Cree's adjusted EBITDA interest coverage being in the high 1x range over the next 12 months, which is weaker than we previously forecast," said S&P Global Ratings credit analyst Andrew Ng.
The outlook reflects our view of the weaker Alberta economy and increased competitive landscape in the Greater Edmonton Area for casino gaming, which we believe could lead to further credit metric deterioration over the next 12 months. We also expect the company to have tight covenant headroom under its covenants, leading us to revise our liquidity assessment on River Cree to less than adequate from adequate.
The company's increased marketing and promotional expenses are behind our revised credit metrics for River Cree. We expect discretionary spending on leisure activities to be lower in the province due to higher unemployment. We also expect an increasingly competitive environment in the Greater Edmonton Area's casino gaming market, based on two refurbished casinos opening in 2016, which could lead to credit metrics weakening for River Cree. Although we expect net revenues to grow in the low-single-digit rate over the next 12 months, we expect adjusted EBITDA interest coverage to be in the high 1.0x range, which corresponds with the highly leveraged financial risk profile category. Our adjusted EBITDA excludes the First Nations Development Fund (FNDF) proceeds available for debt service, and our adjusted interest expense excludes the interest expense that the FNDF covers.
Although we assess liquidity to be less than adequate based on a small cushion on covenant levels, we believe that the structural protection provided through the FNDF for debt service obligations would provide some incentive for lenders to amend or waive covenants.
The River Cree casino resort is just outside Edmonton on the Enoch Cree Nation Reserve, providing it with good access to the city's population and tourist facilities, such as the West Edmonton Mall. The company is the market leader, taking the largest share of coin-in and table revenue, with comparatively high wins per day. In particular, River Cree's market position is supported by the casino's status as the only one in the province that allows smoking, which we believe is a sustainable advantage considering the dearth of native casinos near Edmonton and the moratorium on new casinos in Alberta.
The negative outlook on River Cree reflects weakening macroeconomic trends in Alberta and the increasing competitive landscape in the Greater Edmonton Area for casino gaming, both of which could lead to deterioration in EBITDA.
We could lower the rating if adjusted EBITDA interest coverage approaches 1.5x over the next 12 months due to the weaker Alberta economy and local competitive pressures. A downgrade could also occur if the company's covenant cushion further tightens due to EBITDA margin deterioration.
We could revise the outlook to stable if adjusted EBITDA interest cover remains above 2.5x over the next 12 months. This could occur through reduced costs based on a more stable operating environment and increased number of gamers in the casino, which would increase revenues and EBITDA.