Full House Resorts (NASDAQ: FLL) is unlikely to earn an upgrade to its speculative credit rating over the near term as the casino operator’s debt levels are expected to remain elevated.
That’s the take of Moody’s Investors Service, which downgraded Full House’s speculative grade liquidity rating to SGL-3 from SGL-2. Moody’s reiterated a corporate credit grade of “Caa1” with a “stable” outlook on Full House. That’s one of the research firm’s lowest ratings and implies elevated risk of default. While Moody’s lauded Full House’s increasingly diverse geographic footprint, the ratings agency noted the gaming company’s debt/earnings before interest, taxes, depreciation, and amortization (EBITDA) ratio is poised to remain high for the foreseeable future.
Moody’s expects that Full House’s Debt/EBITDA will remain above the upgrade trigger of 6.0x in the next 12 to 18 months because it will take longer for the Chamonix Casino Hotel in Cripple Creek, Colorado to mature due to opening delays primarily caused by construction labor shortages.”
Chamonix opened in December. Not only is the new casino hotel framed as the most posh in Cripple Creek, it’s expected to be one of the largest drivers of EBITDA and revenue growth in the Full House portfolio as it ramps up.
Full House Can Reduce Leverage
At the end of the third quarter, Full House had $450 million in debt comprised of senior secured notes due in 2028. That compared with cash on hand of $84 million.
While that debt burden is more than double the regional casino firm’s market capitalization of $163.94 million, EBITDA contributions from Chamonix and The Temporary at American Place in Waukegan, Ill. potentially diminish the risk of issuer default. That scenario could improve when the permanent American Place comes online.
“The stable outlook reflects Moody’s expectation that Full House’s earnings will continue to improve in the next 12 to 18 months. Moreover, the company will generate positive free cash flow adequate to cover its fixed charge coverage, while it gradually reduces leverage,” added Moody’s.
In addition to American Place and Chamonix, Las Vegas-based Full House runs a pair of gaming properties in Nevada, one in Indiana, Bronco Billy’s in Cripple Creek, and the Silver Slipper in Mississippi.
How Full House’s Credit Rating Could Get Better/Worse
There’s not much room to the downside for Full House’s credit rating, but a downgrade could come about if the operator sees its liquidity become constrained or if its debt/EBITDA ratio swells beyond 10x.
Conversely, while an upgrade isn’t likely to soon materialize, it’s not a far-flung concept if the gaming company can keep debt/EBITDA around 6x or lower while improving its free cash flow position.
“The company will also need to generate positive free cash flow, which will likely come from the successful opening and ramp-up of Chamonix. This will require Full House to hire enough casino hotel staff while being able to attract the expected level of casino hotel visitation,” concluded Moody’s.
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