S&P: Eldorado Resorts Inc. Ratings Placed On CreditWatch With Positive Implications On Plan To Acquire Isle Of Capri Casinos
"The CreditWatch listing reflects our expectation that we could raise our rating on Eldorado one notch to 'B+' from 'B' if the company completes the acquisition of Isle of Capri Casinos Inc. under the terms Eldorado has outlined," said S&P Global Ratings credit analyst Ariel Silverberg. "We believe the acquisition of Isle of Capri will strengthen Eldorado's business risk position by increasing its scale and expanding its geographic diversity, reducing its concentration in more challenged markets, and improving its profitability, given Isle of Capri's EBITDA margin is higher than Eldorado's."
Eldorado plans to finance the $1.7 billion purchase price (net of expected Lake Charles sale proceeds of $124 million) with around $400 million in equity and the remainder with debt. The planned equity issuance will lessen the leveraging impact of the acquisition. Under this financing scenario, and based on our operating forecast for the combined company, we expect adjusted leverage to be in the mid-5x area or below by the end of 2017. Given our view that the acquisition of Isle will likely improve Eldorado's business risk profile to fair from our current weak assessment, we expect to revise our leverage threshold for Eldorado for a one-notch higher rating to below mid-5x from below 5x based on our current assessment of Eldorado's business risk. We believe entities with stronger business risk assessments can tolerate modestly higher levels of leverage.
The acquisition of Isle of Capri significantly increases Eldorado's asset base by adding 13 additional properties (after giving effect to the sale of Isle of Capri's Lake Charles, La. property) to its current portfolio of seven properties. Additionally, the acquisition will improve Eldorado's geographic diversity by adding five new states (Missouri, Iowa, Florida, Colorado, and Mississippi). Eldorado currently operates properties in Nevada, Ohio, Pennsylvania, and West Virginia. We believe the increased geographic diversity reduces Eldorado's exposure to the negative impact of increased competition in its markets and the potential negative impact of any regional economic weakness, regulatory changes, or weather-related events. Additionally, it will lessen Eldorado's concentration in its most challenged markets. Currently, about 20% of Eldorado's property-level EBITDA comes from its Mountaineer and Presque Isle properties, which have been hurt over the past few years by significant increases in competition in the eastern Ohio market and a smoking ban at the Mountaineer property. Pro forma for the transaction, these properties will represent less than 10% of Eldorado's combined EBITDA.
Furthermore, given that Isle of Capri's property EBITDA margins are generally higher than those of Eldorado, and we expect the company will achieve the majority of its $35 million in expected cost savings related to the acquisition, we believe the acquisition will lead to a modestly higher EBITDA margin for Eldorado, in the low-20% area, compared with the high-teens percent area currently. We believe the high gaming tax rates in Eldorado's current markets combined with the highly competitive nature of its markets, which we believe drives high levels of marketing spending, have caused Eldorado's EBITDA margin to be slightly weaker than that of its peers. We also believe the acquisition will improve Eldorado's national presence and provide an opportunity to achieve scale and efficiency in terms of marketing programs.
In resolving the CreditWatch listing, we will monitor the company's progress in completing the acquisition, including securing required regulatory approvals and executing its planned debt and equity issuances. In the event the acquisition is completed as outlined and Eldorado funds it with at least the level of equity currently anticipated by Eldorado, we would likely raise our ratings on Eldorado one notch because we expect to revise our business risk profile assessment favorably to fair and we expect the combined company will maintain adjusted debt to EBITDA below the mid-5x area. If the terms of the acquisition change, or Eldorado issues more debt to fund the purchase of Isle than we currently anticipate, we would likely affirm our current ratings on Eldorado since adjusted debt to EBITDA would likely stay around the mid-5x area or above, above our threshold for a higher rating, even if we have a more favorable view of Eldorado's business risk.