OREANDA-NEWS. Fitch Ratings has revised the Rating Outlook to Positive from Stable for Boyd Gaming Corp. (Boyd) and Peninsula Gaming LLC (Peninsula) and affirmed their respective Issuer Default Ratings (IDR) both at 'B'. Boyd's and Peninsula's senior unsecured notes were upgraded to 'B-/RR5' from 'CCC+/RR6'. Fitch also affirmed the IDR and all issue-specific ratings for Marina District Finance Company, Inc. (Borgata). A full list of rating actions is at the end of this release.

Peninsula is a wholly-owned, non-guarantor subsidiary of Boyd; however, Fitch links its IDR to Boyd's given the high likelihood that Peninsula will be merged into Boyd's credit group in the near-to-medium term. The call premium on Peninsula's notes goes away this August and Boyd's covenants provide flexibility to refinance Peninsula's entire capital structure. Fitch does not link Boyd's and Borgata's IDRs as Fitch does not believe there is a strong strategic rationale for Boyd to support Borgata, a 50/50 joint venture (JV) with MGM Resorts, should the JV's credit profile deteriorate.

BOYD/PENINSULA KEY RATING DRIVERS

The Positive Outlook reflects Boyd's substantial de-leveraging efforts and improved operations. There is a good probability that Fitch upgrades Boyd and Peninsula within 12-24 months if leverage continues to decline and the operating trends remain intact. Boyd consolidating Peninsula into its restricted group would be another catalyst for upward rating pressure.

Consolidated leverage was 6.1x for the period ending Dec. 31, 2015, down from 7.5x a year ago. The deleveraging has been driven by revenue growth across most of Boyd's markets, improved margins and paydown of debt. Fitch expects these broad trends to continue in 2016 and forecasts consolidated leverage to decrease below 6x by year-end 2016. Fitch's forecast takes into account new competition in Biloxi, MS and the potential softening in Louisiana, a market exposed to the weakening oil industry.

Fitch will look for leverage to sustain at below 6x before considering an upgrade. Although Boyd has stated plans to continue to pay down debt, the company has not articulated publicly a leverage target and has a history of debt funding acquisitions (e.g. Peninsula and IP Resort). That said, the company has also shown prudence in the past, mothballing Echelon during the last recession and has taken a more 'wait and see' approach with a REIT spin-off.

FREE CASH FLOW

Both Boyd and Peninsula credit groups have been generating significant free cash flow (FCF) since 2013 due to EBITDA expansion, declining interest costs, minimal tax expense, and modest capex budgets. For the period ending Dec. 31, 2015, Boyd generated $209 million in FCF, which includes $78 million at Peninsula. Opportunistic refinancings and debt paydown contributed to a roughly $60 million decrease in interest expense from 2013 to 2015. Fitch expects Boyd's tax burden to remain minimal thanks to $913 million of federal-level net operating losses (NOLs) as of Dec. 31, 2015.

Fitch estimates Boyd's discretionary FCF run-rate at approximately $250 million. The estimate incorporates (estimates include Peninsula):

--$588 million of trailing 12-month property EBITDA for the period ending Dec. 31, 2015;
--$60 million of corporate expense;
--$180 million of interest expense;
--$0 of income tax;
--$110 million of maintenance capex;
--$15 million of Borgata distributions.

Boyd has recently benefitted from a more robust recovery in the Las Vegas Locals and Downtown Las Vegas markets, which comprise 27% and 8% of latest 12 month (LTM) EBITDA, respectively. The Las Vegas Locals market's LTM gaming revenues grew by 2.3% during 2015. Supporting these gains is limited new competition and strength in the underlying economic fundamentals of the region, as seen by trends in employment, housing, and consumer spending. Fitch is positive on the Las Vegas Strip and the Las Vegas Locals market indirectly benefits from underlying strength on the Strip.

The remainder of Boyd's operating exposure is in regional markets, for which Fitch has a more muted outlook. A number of Boyd's markets have been subject to new supply pressures (Biloxi, Lake Charles) and energy-related economic weakness (Louisiana). Fitch views Boyd's capex initiatives regarding food & beverage and hotel upgrades positively as they help keep Boyd properties competitive and have helped drive incremental EBITDA growth.

THE NOTES UPGRADE

The upgrade of Boyd's and Peninsula's unsecured notes reflects the improved recovery prospects as the entities have been paying down their respective secured credit facilities with FCF. Additionally, the reduction in debt and increased EBITDA at Borgata and the repayment of the seller note at Peninsula increased the residual equity value from these entities benefitting Boyd.

In the event Boyd consolidates Peninsula into its restricted group using additional secured debt to refinance Peninsula's debt, Fitch feels comfortable that Boyd's unsecured notes will retain its 'RR5' recovery rating (equates to 11%-30% recovery). If Boyd uses only secured debt to refinance all of Peninsula's debt, its secured leverage should not exceed 4.5x.

BORGATA KEY RATING DRIVERS

Borgata's 'B' IDR takes into account the property's sustainable capital structure and improved operations. Leverage was 3.4x as of Dec. 31, 2015, down from 4.8x and 6.8x in 2014 and 2013, respectively. Boyd has publically stated it is comfortable with Borgata's current leverage ratio but could look to de-lever Borgata further should casino expansion in northern New Jersey begins to materialize. Borgata paid $28 million in tax distributions in 2015 to the JV partners. Absent a northern New Jersey expansion, Fitch expects Borgata to continue balancing distributions, capex, and debt paydown as uses of FCF.

The 'B' IDR also takes into account the possibility of additional competition in Philadelphia, New York's Catskills region and northern New Jersey. A pair of bills to expand casinos to northern New Jersey gained political traction in the state's current legislative session and could make it to a state-wide referendum as early as November 2016. Current proposals grant Atlantic City operators priority in the application process and there is also a revenue share provision with Atlantic City. The latter can directly benefit Atlantic City casinos by giving the city more flexibility to reduce the property tax burden, currently a major expense for Atlantic City operators. Significant hurdles remain for expansion, including the need to specify the gaming tax rate among other crucial details. Public resistance to an expansion appears to be lessening, with a February 2016 Fairleigh Dickinson poll showing the percentage of those against expansion vs. support at 50:42, compared to 56:36 in June 2015.

In a scenario analysis done by Fitch, Borgata can withstand approximately a 20%-25% gaming revenue decline before its FCF starts to approach negative territory. This assumes conservatively that the debt remains at current levels and maintenance capex remains high at about $25 million per year. Fitch believes a 20%-25% revenue stress is realistic but is on the high side given Borgata's advantage in terms of its well established loyalty database, brand recognition, high quality amenities and a tax rate advantage. It is also possible that Borgata can further benefit from other casino closures in Atlantic City, similar to what occurred following the four casino closures in 2014.

Borgata will be subject to other competitive pressures as early as 2017 when the Catskills $1.3 billion casino is expected to open, and Fitch expects modest impact on Atlantic City's gaming revenues of approximately 5%. The Philadelphia project's sponsors are facing law suits from the losing license applicants and an incumbent Philadelphia casino; therefore, timing for that new supply is less certain. However, the impact from another Philadelphia casino should be minimal given that the area already has four casinos.

BOYD/PENINSULA KEY ASSUMPTIONS

Fitch's expectations are based on the agency's internally produced, conservative rating case forecasts. They do not represent the forecasts of rated issuers individually or in aggregate. Key Fitch forecast assumptions include:

--Fitch projects flat same store revenue growth across Boyd's operating segments with the Las Vegas segments performing better relative to the regional markets.
--Fitch assumes that state and federal NOLs absorb all tax liability through the rating case horizon.
--Fitch has not incorporated any dividends or share repurchases in its rating case projections. Fitch assumes distributions received from Borgata are steady at about $15 million per year.
--FCF is used to prepay the Boyd credit facility at a similar pace to recent trends.

BORGATA KEY ASSUMPTIONS

Fitch's expectations are based on the agency's internally produced, conservative rating case forecasts. They do not represent the forecasts of rated issuers individually or in aggregate. Key Fitch forecast assumptions include:

--Fitch projects low single-digit growth in 2016 as Borgata remains the market leader in Atlantic City. Fitch projects mid-single-digit declines in 2017 as competitive properties open in New York and Pennsylvania.
--FCF is used to prepay the 2013 and incremental term loans and fund distributions to owners ($28 million paid in 2015).
--Leverage declines below 3x by 2016. Distributions to owners remain modest in the medium-term, but could increase in the outer years if risk of gaming expansion in New Jersey diminishes.

BOYD RATING SENSITIVITIES

Positive: Future developments that may, individually or collectively, lead to positive rating action include:

--Debt/EBITDA declining and remaining below 6x (Fitch forecasts 5.6x and 5.2x for 2016 and 2017, respectively);
--Discretionary run-rate FCF exceeding $200 million on sustained basis (Fitch forecasts $255 million and $283 million for 2016 and 2017, respectively);
--Regional markets remaining stable or growing on same-store basis;
--Consolidation of Peninsula into Boyd's restricted group.

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

--Boyd's debt/EBITDA ratio excluding Borgata moving towards 8x (Fitch forecasts 5.6x and 5.2x for 2016 and 2017, respectively);
--Discretionary run-rate FCF declining towards or below $75 million (Fitch forecasts $255 million and $283 million for 2016 and 2017, respectively);
--Operating pressure with same-store revenues declining over an extended period;
--Boyd pursuing a REIT spin-off or an M&A activity that would result in rent adjusted leverage to increase.

BORGATA RATING SENSITIVITIES

Positive: Positive rating action will likely be limited in the near to medium term due to the potential for increased competition. However, future developments that may, individually or collectively, lead to positive rating action include:

--Sentiment for expanding gaming outside Atlantic City diminishes significantly;
--Discretionary run-rate FCF sustaining at close to or above $100 million;
--Debt/EBITDA sustaining below 4x and greater confidence by Fitch that Borgata can maintain leverage below that level in an event of gaming expansion outside Atlantic City.

Negative: No negative rating action is expected over the next 12-24 months given Borgata's strong financial profile. However, negative rating action may result from:

--Debt/EBITDA approaching 7x;
--Discretionary run-rate FCF/debt declining below 5%.

There could be rating pressure should New Jersey legalize casinos outside Atlantic City. If that occurs, Fitch's decision to potentially revise Borgata's Outlook to Negative or downgrade its IDR will depend on the scope of the expansion measure passed (e.g. number of licenses, tax rate, etc.); the locations, size and amenities of the proposed projects. The operating outlook for Atlantic City absent the expansion and management's response in terms of capital allocation decisions and operational adjustments will also factor into the decision.

FULL LIST OF RATING ACTIONS

Fitch has taken the following rating actions:

Boyd Gaming Corp
--Long-term IDR affirmed at 'B'; Outlook revised to Positive from Stable;
--Senior secured credit facility affirmed at 'BB/RR1';
--Senior unsecured notes upgraded to 'B-/RR5' from 'CCC+/RR6'.

Peninsula Gaming LLC
--Long-term IDR affirmed at 'B'; Outlook revised to Positive from Stable;
--Senior secured credit facility affirmed at 'BB/RR1'.

Peninsula Gaming LLC (Peninsula Gaming Corp. as co-issuer)
--Senior unsecured notes upgraded to 'B-/RR5' from 'CCC+/RR6'.

Marina District Finance Company, Inc.
--Long-term IDR affirmed at 'B'; Outlook Stable;
--Senior secured revolver affirmed at 'BB/RR1';
--Senior secured term loans due 2018 and 2023 affirmed at 'BB-/RR2'.