Overview
— U.S. gaming operator CCM Merger Inc. (CCM) issued $275 million in
senior unsecured notes, the proceeds of which were used to refinance its notes
due August 2013.
— We are assigning the new notes our ‘CCC+’ issue-level rating, with a
recovery rating of ‘6’.
— Our stable rating outlook reflects our expectation that CCM will
continue generating relatively stable cash flow, allowing moderate
deleveraging over the longer term.
Rating Action
On April 4, 2012, Standard & Poor’s Ratings Services assigned its ‘CCC+’
issue-level rating (two notches lower than our ‘B’ corporate credit rating) to
Detroit, Mich.-based CCM Merger Inc.’s $275 million senior unsecured notes due
2019. We also assigned our recovery rating of ‘6’, indicating our expectation
of negligible (0 to 10%) recovery for lenders in the event of a payment
default. CCM used the proceeds from the proposed issuance to repay its senior
unsecured notes due August 2013. Our ‘B’ corporate credit rating on CCM
remains unchanged. The rating outlook is stable.
Rationale
Our corporate credit rating on CCM Merger Inc. reflects our assessment of the
company’s financial risk profile as “highly leveraged” and its business risk
profile as “weak” according to our criteria.
CCM owns and operates the Motorcity Casino Hotel in downtown Detroit. Our
assessment of CCM’s financial risk profile as highly leveraged reflects its
high debt leverage, but we expect the leverage profile to gradually improve.
CCM’s business risk profile is weak, based on its narrow business focus as an
operator of a single casino property in a highly competitive market, and the
persistent, challenging economic conditions in that market. Its relatively
stable operating performance over the economic cycle–and ability to maintain
a sizable market share–somewhat temper these factors.
During 2011, CCM’s net revenue and EBITDA increased in the mid-single-digit
percentage area, driven by increased gaming revenues and a property-tax
refund. We believe EBITDA will decrease in the low single digits in 2012,
because CCM faces slightly increased labor costs on the new collective
bargaining agreement (reached in late 2011) and a difficult comparison with
2011 (which included the tax refund). We expect total leverage, measured in
accordance with its credit agreement, to be in the mid-6x area by early 2013,
providing sufficient cushion relative to the 7.75x covenant threshold in 2013.
Over the longer term, we expect CCM to achieve modest EBITDA growth, by
maintaining a stable share in a market we expect to see GDP-like growth. In
addition, given the scheduled amortization and 75% excess cash flow sweep
provision in the credit facility, we believe CCM’s leverage should improve
toward 6x over the next few years.
We do not expect Penn National Gaming’s Hollywood Casino Toledo (approximately
60 miles from Detroit, scheduled to open in the second quarter of 2012) to
have a material effect on the Detroit market or CCM’s operating performance.
Most of CCM’s customers are within a 25-mile radius of the property, and we
believe only a small percentage of its rated players come from Ohio.
Additionally, several groups want to add additional gaming locations in
Michigan. We view this potential competition as a low-probability issue facing
several hurdles, including the need for the commercial proposal to gain the
requisite signatures to place a proposal on the election ballot and, in the
case of the tribal proposal, the ability to gain federal approval for
off-reservation gaming. We will continue monitoring the potential for
competition.
As reported by the Michigan Gaming Control Board, adjusted gross revenue (AGR)
for the Detroit market increased 3.4%, to $1.42 million in 2011 from 1.38
million in 2010. Motorcity’s AGR increased 5.7% in 2011, resulting in a
market-share increase of about 75 basis points to approximately 33.1%. The
market likely benefited from an improved, albeit still difficult, regional
economic environment over last year. Through February 2012, the Detroit
market’s AGR increased almost 6% (compared with the first two months of 2011),
while CCM’S AGR was up 3%. Unemployment in the region remains high, but the
Bureau of Labor Statistics claims the seasonally adjusted unemployment rate
decreased to 10.5% at the end of December 2011, from 12.4% in December 2010.
Liquidity
Based on expected sources and uses of liquidity over the next 12 to 18 months
and incorporating our performance expectations, CCM has an adequate liquidity
profile, according to our criteria. Relevant expectations and assumptions in
our assessment of CCM’s liquidity profile include:
— We expect sources of liquidity over the next 12-18 months to exceed
uses by at least 1.2x.
— We believe sources of liquidity will remain positive, even if EBITDA
declines by 15%.
Sources of liquidity include the undrawn balance of the $20 million revolver,
some excess cash on the balance sheet, and internally generated cash. Uses of
liquidity include interest and amortization payments, capital expenditures
(primarily maintenance related and limited under the credit agreement), and a
75% excess cash flow sweep. Financial covenants under the credit facilities
include a minimum interest coverage ratio, maximum first-lien and total
leverage ratios, and a maximum capital expenditures limit. Under our
performance expectations, we expect CCM to maintain adequate cushion under the
covenant levels.
CCM’s nearest maturity is the revolver in 2016 followed by the term loan in
2017. CCM recently announced they are seeking an amendment to reduce pricing
on the term loan. Although the potential for reduced interest expense is a
credit positive, we do not anticipate the reduction in interest will be
significant enough to support higher ratings.
Recovery analysis
For the complete recovery analysis, see Standard & Poor’s recovery report on
CCM Merger Inc., to be published following this report, on RatingsDirect.
Outlook
Our stable rating outlook on CCM Merger reflects our expectation that CCM will
continue generating relatively stable cash flow, allowing moderate
deleveraging over the intermediate term. Despite our expectation for a
low-single-digit percentage decline in EBITDA in 2012, we believe credit
measures will improve over the longer term from modest growth in EBITDA,
scheduled term-loan amortization, and the 75% excess cash flow sweep provision
under the credit facility.
We could consider an upgrade if we believe performance improvements would
drive leverage below 6x within the subsequent 12 months. Under our current
forecast, we expect leverage to remain above 6x through 2013. Downside rating
pressure could result from meaningful underperformance to the point where a
covenant violation becomes likely, or if we believe interest coverage could
fall below 1.5x.
Related Criteria And Research
— Methodology And Assumptions: Liquidity Descriptors For Global
Corporate Issuers, Sept. 28, 2011
— Criteria Guidelines For Recovery Ratings, Aug. 10, 2009
— Business Risk/Financial Risk Matrix Expanded, May 27, 2009
— 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
Ratings List
CCM Merger Inc.
Corporate Credit Rating B/Stable/–
New Rating
CCM Merger Inc.
Senior Unsecured
US$275 mil 9.125% sr nts due 2019 CCC+
Recovery Rating 6
