Red Hawk Casino (Shingle Springs Tribal Gaming Authority) Continues to Grow Bottom Line
Cris Alarcon, PRpond, June 27, 2012Red Hawk Casino continues to improve the bottom line by increased customer traffic and reduced costs. Financial rating companies predicted a decrease in 2011 but the casino turned around mid-2011 to turn increased profits the second half of 2011. The increase was built upon in the first half of 2012. Also in 2012 the casino has hired a new General Manager, Bryan DeLugo, and Scott Bean has been named Vice President of Marketing.
Standard & Poor's Ratings Services' reports: Shingle Springs Tribal Gaming Authority (the Authority) reflects our assessment of the company's financial risk profile as "highly leveraged" and our assessment of the company's business risk profile as "weak", according to our criteria.
Our assessment of the Authority's financial risk profile as highly leveraged reflects its weak liquidity position, high debt leverage, and our expectation that it will have difficulty generating sufficient cash flow to support its current capital structure over the intermediate term. Our assessment of the Authority's business risk profile as weak reflects the company's narrow business focus as an operator of a single gaming facility, which operates in a competitive market. The Tribal Council of the Shingle Springs Band of Miwok Indians (the Tribe) established the Authority to develop and operate the Red Hawk Casino (near Sacramento, California); it has approximately 2,200 slot machines and 77 table games.
For the full year ended December 2011, EBITDA before management fees (EBITDAM) increased in the high-single-digit percentage area, outperforming our low-single-digit EBITDAM decline expectation, mainly because of a reduction in the calculation of the compact fee, and partly because of an increase in customer traffic in the second half of the year. Through the first quarter of 2012, EBITDAM grew in the low-teens percentage area, but this compares with a weak first-quarter 2011, largely because of the impact in 2011 from the upgrade of competing property Thunder Valley (the upgrade opened July 2010). For full-year 2012, we expect flat to slight growth in EBITDAM, reflecting our economists' expectation for only a modest increase in consumer spending and persistent high unemployment, which we believe will preclude any meaningful growth.
In May 2011, the Authority received an amendment to its furniture, fixtures, and equipment (FF&E) facility eliminating the senior leverage covenant, but it will still need to meet a minimum fixed charge coverage ratio of 1x. Lakes Entertainment Inc. (which manages the casino) is deferring principal payments on its loan to the Authority until the end of December 2013. Lakes is still receiving interest payments and a management fee. The amendment alleviates the potential for a leverage covenant violation and the deferral of Lakes' principal payments temporarily lowers the near-term fixed charge level. Based on our current performance expectations, we believe the Authority will generate a level of cash flow that will approximate fixed charges in 2012, and believe excess cash can support a shortfall if performance is slightly worse than expected. However, in the intermediate term, it is not clear the casino will generate enough cash flow to support its current capital structure, especially given the large principal repayments due to Lakes in 2014. This may lead the Authority to pursue a restructuring of some of its debt obligations. Management fees and payments under the Lakes loan are subordinated to debt service requirements under the senior notes.