Locals’ strength reflected in Herbst ratings

Thursday, July 18, 2002 | 11:14 a.m.

Moody's Investors Service this week revised the ratings outlook for Herbst Gaming Inc. of Las Vegas to stable from negative as the company's casinos and grocery store slot operations posted strong numbers by attracting locals' gamblers.

Moody's also confirmed its existing speculative-grade ratings on Herbst's debt and corporate profile:

$170 million senior secured notes due 2008 at B2.

Senior implied at B2.

Long-term senior unsecured issuer rating at B3.

"The ratings outlook revision to stable from negative reflects the company's consistent revenue and cash flow performance despite the negative impact on the Las Vegas gaming market resulting from the events of Sept. 11, 2001," Moody's said.

Moody's in October changed Herbst's ratings outlook to negative from stable based on the expectation that the events of Sept. 11 would hurt Herbst's primary customer base, the Las Vegas locals gaming market.

"While the tragedy did have some near-term impact on the local Las Vegas economy, stability in Herbst's route operations and improvements in casino operations helped the company to maintain creditor protection measures consistent with the current rating," Moody's said.

Route operations, which account for about 70 percent of the company's revenues, reported an 8.2 percent increase in revenues for the three-month period ended March 31, while route EBITDA (cash flow) increased more than 21 percent during the same period, Moody's said.

Casino revenues increased almost 6 percent while casino cash flow rose about 9.1 percent, Moody's said.

Besides improving the company's debt-to-cash flow ratio, Herbst continued to generate positive cash flow after interest, taxes, working capital, and capital expenditures -- about $15 million for the year ended March 31.

The ratings confirmation considers the company's relatively small size and dependence on route contracts with the Vons and Alberstons grocery store chains, which combined account for more than 20 percent of the company's revenue, Moody's said.

The ratings acknowledge that the company's growth is highly dependent on the growth of store chains in the Las Vegas area. Positive ratings consideration was given to Herbst's recent operating results, moderate capital spending requirements, minimal scheduled long-term debt maturities over the next five years and high recurring revenue stream from slot operations.

Herbst Gaming owns about 7,000 slot machines throughout Nevada, along with its Terrible's hotel-casino in Las Vegas and three smaller casinos.