Riviera joins trend, will refinance $215 million

Thursday, June 20, 2002 | 11:15 a.m.

SUN STAFF AND WIRE REPORTS

Casino operator Riviera Holdings Corp. of Las Vegas is the latest gaming company tapping the junk bond market to refinance existing debt.

Riviera, which owns and operates the Riviera Hotel and Casino on the Las Vegas Strip and the Riviera Black Hawk Casino in Black Hawk, Colo., is offering $215 million in senior secured notes to refinance the company's 10 percent first mortgage notes due 2004 and Riviera Black Hawk Inc.'s 13 percent first mortgage notes due 2005.

The new issue priced Wednesday at 11 percent, Riviera said.

The eight-year notes, which carry mid-range junk ratings of B2 from Moody's Investors Service and single-B-plus from Standard & Poor's, were being marketed with a return of between 11 percent and 11.25 percent, according to people looking at the deal.

The Riviera offering follows several other similar deals from gaming and lodging companies, which have tried to take advantage of the low interest-rate climate and the positive performance of the sector.

"We were pleased we were able to up it to $215 million. There were probably twice as many people interested as the last time around," Riviera Treasurer and Chief Financial Officer Duane Krohn told Bloomberg News. "Interest rates were reasonable, given the market conditions."

"We had a very difficult time right after Sept. 11, but we've had progressive increases in visitation," he said. "Some of that was sacrificed on room rates, but we've got our occupancy back now, and now we're going to increase our rates."

Riviera said it expects to secure preliminary approvals to develop a hotel-casino about 22 miles south of St. Louis. Construction could begin in 2003, with a completion date in late 2004 or early 2005, if the project is approved by state regulators, the company said. It has also filed an application to build a "racino" -- a horse racing facility with 600 slot machines -- in Hobbs, N.M. Only one of four applicants will be granted the license.

Venetian Casino Resort LLC/Las Vegas Sands Inc., Sun International Hotels Ltd. and John Q. Hammons Hotels Inc. all have completed refinancing via junk bonds.

But the still-uncertain climate for credit quality has made investors selective and not all the proposed issues have been successful.

Hotelier Wyndham International Inc. and Donald Trump both scrapped junk bond sales in the last two months, hoping to try to price bonds at more attractive levels at a later date.

At $215 million, the Riviera deal is a more manageable issue to place than Wyndham's $750 million and Trump's $470 million offerings, analysts and investors said. Still, the company's high leverage isn't to be ignored, especially in the current jittery market.

"The size helps, but the leverage versus its peers has always been on the high side," Jacques Cornet, a gaming analyst with CIBC World Markets, told Dow Jones News Service.

Cornet said Riviera is a niche player in the gaming market focusing more on the hard-core slot machine player versus high rollers or tourist clientele. "They have a very loyal customer following in Las Vegas," he said.

But Riviera is risky.

In its recent ratings announcement on the issue, S&P credit analyst Michael Scerbo warned that "ratings could be lowered if the company's overall financial profile does not strengthen, as expected, from current levels to provide a cushion to fund possible investment opportunities."

The company also didn't have too much incentive to go any higher on the coupon.

"The blended rate (of the two issues that will be refinanced) is less than 11 percent," Jane Pedreira, a gaming analyst with Lehman Brothers, told Dow Jones. "They are paying up to get some improvement in financial flexibility to fund a project in New Mexico. They can't really afford to offer a rate too much higher than they have now because cash flow is tight."

The company also intends to enter into a new senior secured revolving credit facility of about $30 million.

"This refinancing solidifies our capital structure and provides us the opportunity to develop new gaming properties much like we did with Riviera Black Hawk," Riviera Chairman and Chief Executive William Westerman said in a statement.