Slow-starting city casino's credit rating downgraded

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Less than two months after it opened, the Rivers Casino has become a riskier bet for one prominent New York credit rating agency.

Standard & Poor's downgraded the credit rating for casino affiliate Holdings Gaming Borrower one notch yesterday, from B to B-minus, citing concerns about the Rivers' "weak operating performance" and its ability to meet debt service payments if there's no change in fortunes.

At the same time, the agency put Holdings Gaming on its CreditWatch, with negative implications, meaning there's about a 50 percent chance the rating could be dropped again.

The moves come as the North Shore casino, which opened with great fanfare Aug. 9, fails to produce revenues anywhere close to its own estimates or even those of the rating agency.

For the week of Sept. 14-20, the casino suffered its worst seven-day stretch since its opening, generating $3.6 million in gross terminal revenue on $45.1 million in wagers, ranking it seventh among the nine slots venues in the state. It continued a slide that began after a big opening week.

In its statement, Standard & Poor's said the casino earned about $20 million in gross terminal revenue in its first four weeks, or about $235 per slot machine per day. That's well below the $300 per slot machine expected by the rating agency.

While variables like holidays, games at Heinz Field, and even the weather can influence the numbers, the "observed performance is meaningfully weaker than our prior expectations," Standard & Poor's stated in downgrading the rating.

"It's not as if they're just marginally below [expectations]. They're meaningfully below," said Craig Parmelee, who manages Standard & Poor's gaming and lodging team.

Unless there's rapid improvement, the agency fears the casino may not produce enough revenue to meet its debt service obligations once it has exhausted interest reserve accounts set up to provide a cushion.

Standard & Poor's said a $97 million reserve account will be depleted during next year's first quarter, adding to the concerns about revenue performance. The agency said the casino faces debt service payments totaling more than $55 million next year before ballooning to about $75 million in 2011.

"The numbers we're seeing suggest a level of performance that would not allow the company to meet its obligations over time. In the absence of some pretty meaningful improvement, we're concerned that the company will not generate enough internal cash to meet its obligations," Mr. Parmelee said.

Casino officials declined comment on the downgrade yesterday but have said in the past they remained confident they could hit their own estimation of $427.8 million in gross terminal revenue in the first year of operation. They said they planned to implement a more aggressive promotional campaign and to increase tour bus traffic as a means of boosting play.

Standard & Poor's blamed the Rivers' weaker-than-expected start on several factors, including its urban location, competition from The Meadows Racetrack and Casino in Washington County and gambling venues in West Virginia, and traffic congestion, particularly during football games at Heinz Field.

Mr. Parmelee said it's "not atypical" for casinos to be downgraded so early in their lives. Generally speaking, about 30 percent of new casinos don't survive under their original capital structure. "In this economy that percentage may increase," he said.

"There tends to be a lot of debt on these properties. They make money, but a large share of that money goes to repay the debt," he said.

Mr. Parmelee would not predict whether he thought the Rivers Casino could reverse its fortunes, although he noted that it's usually harder to fix lower-than-anticipated revenues than other issues, like excessive spending.

"If you're making enough revenue, you can always adjust expenses accordingly. If you're not generating enough revenue, you need to drive more volume through the property, and that's more challenging," he said.

At B-minus, the Rivers' rating is already the equivalent of junk bond status, but that is not unusual for casinos. However, if the rating were to fall another notch to CCC, it would mean, at least as the rating agency sees these things, that the property would be "vulnerable" to default and would be dependent on favorable business, financial and economic conditions to meet timely payments related to debt.

The Rivers' weaker-than-expected performance also has attracted the attention of state Gaming Control Board members. Commissioner Ken McCabe said yesterday officials are reviewing the statistics and trying to determine why the casino is not performing up to expectations.

He said numbers at the state's nine casinos seem to be down across the board, adding there could be a number of factors at work, including the economy.

Asked if he is worried about the Rivers' slow start, Mr. McCabe replied, "I wouldn't say I'm worried, but I'm not an investor. If I were an investor and I got these numbers, I might be worried."

Mark Belko can be reached at or 412-263-1262.


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