Station debt downgraded, Boyd on negative watch

David Strow

Wednesday, Jan. 23, 2002 | 11:03 a.m.

Moody's Investors Service cut the credit rating of Station Casinos Inc. this morning, citing concerns about the heavy debt load of the Las Vegas locals' casinos operator.

Station's senior implied rating was lowered from "Ba2" to "Ba3," its senior subordinated note rating from "B1" to "B2," and its unsecured rating from "Ba3" to "B1." Even before the downgrade, Station's ratings were considered high-yield, or "junk."

About $1.4 billion in debt was affected by the downgrade.

"It's really not unusual to have a rating agency reduce a credit rating after a significant acquisition and development period, and obviously that was the case for Station in 2001," said Station Chief Financial Officer Glenn Christenson. "The timing of this announcement is unfortunate, however, because our business has been improving."

Moody's downgraded the company after concluding it was likely the company's debt ratio would remain above 4.5 times annual cash flow for the next two years. This ratio is required to maintain the earlier ratings, Moody's said.

"The combined effect of weaker than expected fiscal-year 2001 results, historical share repurchases, and significant acquisition and development capital expenditure activity has resulted in a meaningful increase in leverage over the past 12 months," the Moody's report stated. "While the company has stated that it intends to reduce leverage, Moody's does not expect that Station will be able to manage down to the (four to 4.5 times debt-to-cash flow) range by the end of 2003."

Downgrades can make it more difficult for a company to raise capital, and they can also result in a company paying higher interest rates. But Christenson said he didn't expect the downgrade will result in much financial fallout for the company.

"We don't expect it to have much impact, because the information they (Moody's) commented on in the release is certainly well-known to everyone already," Christenson said. "We're going to continue to execute on our strategy of focusing on operations and paying down debt."

Gaming analyst Andrew Zarnett of Deutsche Banc Alex. Brown agrees Station should feel little financial pain from the downgrade, at least in the short term.

"Long-term, if their fundamentals don't improve, it may be more costly for them to finance their business," Zarnett said. "Often rating changes are ... reactionary, looking (at the) last 12 months ... versus a forward basis. We clearly see fundamentals at Station improving from here, and we would expect sometime before the end of the year, as leverage comes down, the ratings will improve."

The downgrades came one week after Moody's cut MGM MIRAGE and Park Place Entertainment Corp. from investment grade to junk status, citing concerns over a continuing slowdown in the Las Vegas tourism market.

However, Boyd Gaming Corp. avoided becoming the latest to be hit by a downgrade; this morning, Moody's confirmed its ratings on the Las Vegas gaming company. Boyd already carries junk ratings.

"While (Sept. 11) did have some impact on Boyd's operating cash flow, particularly with respect to the Stardust ... improvements at other properties are expected to more than offset these losses," Moody's said.

The agency also cited the pending opening of the Delta Downs racetrack and casino next month.

However, Boyd was placed on negative ratings watch, meaning future credit downgrades are still under consideration.

If Boyd does not meet expectations for reducing its debt load over the next several quarters, "the company's ratings will most likely be lowered," Moody's said.