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January 26, 2015

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S&P: Fontainebleau could have trouble making payments

Fontainebleau Las Vegas

Beyond the Sun

The Fontainebleau Las Vegas resort is expected to have trouble making interest payments once it opens for business this year because of the worsening economy and dim prospects for condo sales, bond rating agency Standard & Poor's said today.

S&P is forecasting earnings declines for Strip casino operators "similar to those observed in recent quarters" through at least mid-2009, followed by a "modest recovery" in 2010.

The $2.9 billion Strip resort, under construction north of the Riviera and south of the Sahara, is expected to open in October with 3,185 rooms. Developers hoped to sell as many as 1,000 of them as condo-hotel units. Those proceeds will likely be insignificant, S&P analysts said today.

Sale proceeds from condos aren't needed to complete the resort but are necessary to reduce debt after opening, S&P said. Absent condo sales, Fontainebleau will have an interest burden of about $200 million on debts of $2.9 billion, S&P said. Earnings are expected to fall short of interest payments, which could trigger a default.

S&P, which rates the bonds of major gaming operators, has slashed earnings projections for Fontainebleau along with some other gaming operators. S&P also cut the resort's credit rating.

"The ratings downgrade reflects our concern that, given the substantial pullback in consumer discretionary spending and its pronounced effect on the gaming sector in general and, more specifically, on the Las Vegas Strip, Fontainebleau Las Vegas' ability to generate sufficient cash flow to service its capital structure is in doubt," S&P credit analyst Ben Bubeck said in a statement.

Fontainebleau has a "disadvantaged location" at the north end of the Strip, where various nearby projects have been postponed, S&P said. Those include Boyd Gaming's Echelon, the Plaza Las Vegas and a proposed resort jointly owned by MGM Mirage and Kerzner International.

The rating agency lowered its corporate credit rating on Fontainebleau Las Vegas Holdings LLC to "CCC" from "B-", cut the rating on the resort's $1.85 billion in senior secured notes to "CCC" from "B" and lowered the rating on $675 million second mortgage notes to "CC" from "CCC".

S&P expects a 30 percent to 50 percent recovery for senior secured lenders in the event of a default and "negligible" recovery of up to 10 percent for second mortgage lenders in the event of a default.

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