Fitch Rates Chester Downs' Sr. Secured Notes 'BB-/RR1'; Affirms IDR at 'B-'

NEW YORK--(BUSINESS WIRE)-- Fitch rates Chester Downs and Marina LLC's (Chester Downs) proposed $315 million in senior secured notes due 2020 (notes) 'BB-/RR1'. Fitch also affirms Chester Downs' Issuer Default Rating (IDR) at 'B-' and assigns a 'B-' IDR to Chester Downs Finance Corp., a co-issuer in this transaction. The Rating Outlook is Stable.

The proceeds from the notes will refinance approximately $230 million outstanding on Chester Downs' term loan, pay a dividend of about $72 million to the members and pay the transactions costs. The notes will be secured by Chester Downs' assets, which mainly consist of a race track and the 100,000 square foot Harrah's Chester casino, located 15 miles from downtown Philadelphia.

Chester Downs is 95% owned by Caesars Entertainment Corporation (Caesars) through its primary operating subsidiary, Caesars Entertainment Operating Co. (CEOC; 99.5% pro forma for the minority holders' anticipated put). Fitch rates CEOC's IDR 'CCC', which reflects, among some other concerns, the company's high leverage and weak cash flow profile. Full analysis of Caesars is available in report published by Fitch (see below for link). There are no guarantees or cross-default provisions between Chester Downs and CEOC.

Chester Downs' stand-alone credit profile is stronger than CEOC's, characterized by more manageable leverage (around 4.5 times [x] on a pro forma basis using EBITDA net of management fees) and decent cash flow levels that are more indicative of at least a mid 'B' IDR. Chester Downs' 'B-' IDR incorporates moderate linkage to the weaker parent, which can, up to a point, extract cash from the subsidiary. However, the ability to increase debt and pay dividends are largely limited by the notes' covenants, which are slightly more relaxed, albeit still adequate, compared to those in the term loan that is being refinanced.

Restricted payments (RP) are mainly governed by an RP basket that is based on cumulative EBITDA minus 1.55x interest expense (term loan RP basket was built using 50% of net income). Further, to pay dividends, fixed charge coverage must remain above 2x (2.25x per the term loans' covenants) and leverage must be less than 3.0x (2.5x for the term loans). The general RP carveout has been, however, reduced to $10 million ($20 million if leverage is less than 4x) from $25 million.

The fixed charge test continues to govern additional issuance but is now lowered to 2.0x from 2.25x. There also remains a $50 million carveout for junior debt issuance. As with the term loans, there are no financial maintenance covenants. Chester Downs does not have a revolving credit facility, but there is a $10 million minimum liquidity requirement.

The 'RR1' Recovery Rating (RR) reflects Fitch's expectation of the recovery prospects for the notes in the 91%-100% range in an event of default. The RR could be pressured if the expected $315 million principal amount of notes is up-sized.

Philadelphia Market Under Competitive Pressure:

Chester Downs could come under material competitive pressure in the near-to-medium term from the announced expansions at SugarHouse and Parx casinos, which are the primary competitors in the Philadelphia market. Parx is planning to open up 39,000 square feet of additional gaming space by mid-2012 along with other amenities. SugerHouse plans to open its expansion by late 2013, which will more than double its gaming floor in terms of square feet.

Longer term, one remaining category 2 license (permits up to 5,000 slots and 250 tables) remains outstanding in Pennsylvania after a Mashantucket Pequot-led (Foxwoods) consortium lost the license in 2010. The group planned to construct its project in the Philadelphia area but it is not clear where the license will get approved now, if it gets reissued.

Other anticipated competitive pressures that may have a more modest impact include the spring 2012 openings of Revel in Atlantic City and gaming operations at the Valley Forge Convention Center (18 miles away). More on the periphery, there is considerable gaming expansion happening in New York (Aqueduct and the governor's proposal to expand non-tribal gaming) and Maryland (Maryland Live! and the Baltimore license).

Some of the competitive pressure will be offset by continued ramp up in table games at Chester Downs, which commenced table game operations in July 2010. Table game revenue grew 15% year-over-year in the three month period ending Dec. 31, 2011 although sequential growth in table revenues looks to be tapering off. Chester Downs will get an additional benefit from tables in September 2012, when the table tax rate is scheduled to go to 14% from 16%.

The current ratings incorporate a moderate EBITDA decline stemming from increased competition that is coming on line over the next 12-24 months.

Additional information is available at 'www.fitchratings.com'. The ratings above were unsolicited and have been provided by Fitch as a service to investors.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 12, 2011);

--'Recovery Ratings and Notching Criteria for Non-financial Corporate Issuers' (May 13, 2011);

--'Caesars Entertainment Corp. Full Rating Report' (March 23, 2011);

--'U.S. Gaming Operators' Recovery Models' (Jan. 4, 2012);

--'2012 Outlook: Gaming -- Market Exposure the Differentiating Factor' (Dec. 13, 2011).

Applicable Criteria and Related Research:

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229

Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=628489

Caesars Entertainment Corp.

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=612585

U.S. Gaming Operators' Recovery Models

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=613365

2012 Outlook: Gaming -- Market Exposure the Differentiating Factor

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=658770

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