Casino finances 'highly vulnerable'

Standard & Poor's, citing heavy borrowing and high interest rates, gives slots venue a poor credit rating

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Standard & Poor's has assigned a low credit rating for Don Barden's North Shore casino because of concerns about the lack of cash equity in the financing of the slots parlor.

In a report released Thursday, the prominent New York rating agency tied the action to the significant debt service costs the casino will face after its projected opening in May 2009.

The B minus rating with a negative outlook for PITG Gaming HoldCo, which was set up as part of the casino's financing, "suggests that the project is highly vulnerable," given the lack of cash equity and heavy borrowing, Craig Parmelee, a Standard & Poor's credit analyst, said yesterday.

The rating, the first ever for PITG Gaming by Standard & Poor's, would be considered "very much on the low side" for casinos, which typically carry speculative grade B ratings, he said.

Mr. Parmelee said the reason for the low rating is that the casino is being funded entirely through debt, with no cash equity from either Mr. Barden or any of the other investors in the project.

That means that the casino must get off to a strong start to meet its debt service payments, he said. A delay in the May 2009 opening could further complicate matters, according to S&P.

"Start-up facilities don't often open incredibly smoothly. There are bumps along the way. When you have a high fixed charge burden, it makes it even more important that the opening goes very smoothly," Mr. Parmelee said.

"We like to see a capital structure that allows for a significant ramp-up period. We don't believe this one does that."

Having no cash equity in a project is unusual, he added. Typically, "you really would like to see 25 percent to 40 percent of a project funded with cash equity," he said.

Standard & Poor's assigned the rating the day Mr. Barden was before the Pennsylvania Gaming Control Board to discuss the financing and other changes he is proposing for the casino, including a request to drop $3 million in funding for Hill District redevelopment.

According to his petition, he is asking the board to approve loans of $390 million and $260 million from international lender Credit Suisse and another $150 million in borrowing backed by the police, fire and general retirement systems of the city of Detroit, where he lives.

Mr. Barden said the cost of construction has increased to $600 million, up from an original estimate of $450 million. He blamed the increase on lawsuits filed by the losing bidders and other delays. Soft costs and the $50 million licensing fee have added another $170 million for a total payout of $770 million.

The gaming board put off a vote on the proposed financing for three weeks until it holds another hearing on the matter May 14. Mr. Barden wanted the board to act sooner because he needs to pay off a $200 million bridge loan he secured to start construction by May 19.

Mr. Parmelee couldn't say what impact the credit rating would have on Mr. Barden's bid to complete his financing. He called the rating "one factor in his ability to borrow money."

"It's a difficult credit environment, and it's been challenging for companies at this rating level to get financing the last couple of months," he said.

Other analysts said the interest rates on the Credit Suisse borrowing Mr. Barden is proposing range from 9 percent to 16 percent, which is not unusual given the current credit crunch, but expensive, nonetheless. The $150 million pension fund-backed borrowing has a far lower rate, one favorable to Mr. Barden, they said.

Allegheny County Chief Executive Dan Onorato and Pittsburgh Mayor Luke Ravenstahl are expected to meet with Mr. Barden Monday to discuss the financial issues and his request to drop the $3 million in funding for the Hill. Mr. Barden said he wants to end the commitment because it was tied to development rights to the Mellon Arena property that ended up going to the Penguins.

The mayor has said he wants to see Mr. Barden honor the commitment. Mr. Onorato said he's keeping an open mind.

Mr. Barden could not be reached for comment yesterday.

The PITG Gaming credit rating was not the only bit of bad news for Mr. Barden from Standard & Poor's on Thursday. The agency also downgraded the credit rating for Mr. Barden's Majestic Star Casino LLC, which operates casinos in Indiana, Mississippi and Colorado, from B minus to CCC plus because of the ongoing financial woes facing the company.

Majestic Star lost $26.1 million last year and is $556.7 million in debt, impairing its ability to borrow money to upgrade its casinos to compete more effectively.

The agency was particularly concerned about the situation in Indiana, where Mr. Barden owns two casinos, including one he acquired from Donald Trump in late 2005, and which provide close to 70 percent of the revenues for Majestic Star.

One new casino has opened near the Indiana-Michigan line and three others are undergoing significant renovations that will make it more difficult for Mr. Barden to compete.

Given the environment and the heavy debt, Standard & Poor's said it had concerns about Majestic Star's ability to meet its debt obligations, including a cash payment due on April 15, 2009.

Mr. Barden has said in the past that the problems with Majestic Star had nothing to do with the Pittsburgh casino, which was set up as a separate entity.

But one analyst, Gregg Klein of BNP Paribas Group, said the woes could have some effect on Mr. Barden's ability to secure financing in Pittsburgh.

"It shouldn't because they're separate projects, and we think Pittsburgh will be successful. But it brings into question Don Barden's ability to succeed or to pull it off," he said.


Mark Belko can be reached at mbelko@post-gazette.com or 412-263-1262.


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