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Affinity Gaming Corporation -- Moody's says Affinity Gaming's ratings are unaffected by $70 million secured note add-on

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Announcement: Moody's says Affinity Gaming's ratings are unaffected by $70 million secured note add-onGlobal Credit Research - 19 Apr 2021New York, April 19, 2021 -- Moody's Investors Service today said Affinity Gaming Corporation's ("Affinity") ratings are unaffected by the company's proposed $70 million add-on to its 6.875% 1st lien senior secured notes due 2027. Affinity has a B3 Corporate Family Rating, B3-PD Probability of Default Rating, and stable outlook.Proceeds from the proposed add-on will initially be placed on the company's balance sheet and can be used for general corporate purposes, including working capital, capital expenditures and permitted acquisitions.The add-on offering is credit negative because it increases debt, cash interest and leverage with a lack of clarity on how the proceeds will be used to enhance earnings. However, the B3 CFR and stable outlook are not affected because leverage remains within Moody's expectations for the rating and the additional cash provides incremental liquidity until proceeds are deployed.The $70 million senior secured add-on will be issued under the indenture and have the same terms as the company's $475 million 1st lien senior secured notes rated B3. Affinity's senior secured notes represent the preponderance of debt in Affinity's capital structure and have a subordinated lien on the collateral relative to the lien pledged to the company's $50 million super senior revolver (not-rated).Pro forma for the add-on, Affinity's balance sheet cash will be $143 million and total outstanding debt will be $545 million. Moody's adjusted debt-to-EBITDA based on $545 million of outstanding debt and EBITDA for the fiscal year ended 31-Dec 2020 is very high at 11.5x. However, applying an annual run-rate based on Affinity's 31-Mar 2021 EBITDA of $24 million, debt-to-EBITDA is 6.1x, slightly above the 6.0x factor Moody's indicated could lead to an upgrade, and consistent with what Moody's views as appropriate for B3-rated gaming issuers with Affinity's asset profile.Affinity's B3 Corporate Family Rating reflects the company's geographic diversity and ability to generate positive free cash flow despite challenging operating conditions. Key concerns included Affinity's relatively small scale in terms of revenue and earnings, relatively high leverage, and historically aggressive financial policy evidenced by payment of a leveraged dividend in early 2018 by ownership, Z Capital Partners, LLC.Moody's assumes in the ratings that debt-to-EBITDA is reduced to a 6x-7x range by the end of 2021. Affinity's ratings continue to reflect that the coronavirus pandemic remains an overriding credit concern for the company and other regional gaming issuers. Affinity's casinos are still vulnerable to future closings and capacity restrictions that create earnings uncertainty. Affinity's reopened casinos are experiencing near-term earnings and margin benefit from limited competition from other entertainment choices that are more restricted due to the coronavirus. However, competition for consumer discretionary spending from these alternate and popular entertainment choices, including movie theaters and restaurants, will eventually return once they increase volume and open. Affinity and other regional casino issuers also remain vulnerable to a challenging macroeconomic environment and the increased possibility that gaming customers limit their spending to more essential goods and services, leaving less for casino-type gaming, which is a highly discretionary form of entertainment.Affinity filed a form S-1 in January 2021 to sponsor the formation of Gaming & Hospitality Acquisition Corp. (GHAC), a special purpose acquisition corporation. The company intends to merge into GHAC in connection with an initial acquisition of gaming assets by GHAC, but the identity of any such target is unknown. Because the likelihood and details of any transaction are unknown, there is no current effect on Affinity's rating or outlook. Moody's would assess the effects of any transaction on Affinity's operating and financial profile as well as the impact on Affinity's debt structure to determine if the company's ratings are affected. GHAC is a subsidiary of Affinity Gaming Holdings, who is also the indirect parent of Affinity. GHAC is not part of Affinity's borrowing group and not an obligor to the senior secured notes.The coronavirus outbreak, the government measures put in place to contain it, and the weak global economic outlook continue to disrupt economies and credit markets across sectors and regions. Our analysis has considered the effect on the performance of Affinity from the current weak US economic activity and a gradual recovery for the coming year. Although an economic recovery is underway, it is tenuous, and its continuation will be closely tied to containment of the virus. As a result, the degree of uncertainty around our forecasts is unusually high. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. The gaming sector has been one of the sectors most significantly affected by the shock given its sensitivity to consumer demand and sentiment. More specifically, the weaknesses in Affinity's credit profile, including its exposure to travel disruptions and discretionary consumer spending have left it vulnerable to shifts in market sentiment in these unprecedented operating conditions and Affinity remains vulnerable to the outbreak continuing to spread.Moody's views Affinity's liquidity as good, as it represents slightly more than 12-months of the company's estimated no-revenue scenario monthly cash burn (including debt service and maintenance capital expenditures) of about $9 million. The covenant-lite nature of the company's financial covenants is also a factor supporting liquidity. Affinity is subject to a first-lien debt-to-EBITDA coverage test that starts at 6.75x and eventually drops to 6.0x, but the test is only required if the outstanding amount under the revolver is greater than $10 million. The company has equity cure rights, too. Pro forma cash is about $132 million, and Moody's expects Affinity will generate $20 to $25 million of annual free cash flow. As a result, Moody's expects that Affinity will not have to draw on its $50 million revolver.The stable outlook considers that although debt-to-EBITDA for the latest 12-month period ended 31-Mar 2021 was very high at over 11x -- this figure includes the period beginning 17-Mar 2020 when all the companies gaming properties were temporarily closed due to COVID-19 --- pro forma debt/EBITDA applying an annual run-rate based on the 31-Mar 2021 quarter EBITDA results in much lower debt-to-EBITDA at about 6.1x, a level Moody's expect the company to stay through the end of this year.While there is uncertainty regarding the level of sustainable earnings when competing entertainment options reopen, the stable outlook reflects that Affinity has aggressively managed costs and stabilized performance in a challenging operating environment. Affinity's pro forma debt structure does not have any pre-payable debt, and as a result, any improvement in leverage will need to be driven by higher EBITDA performance. The stable outlook also reflects Affinity's good liquidity.A ratings upgrade is unlikely given the weak operating environment and continuing uncertainty related to the coronavirus. An upgrade would require a high degree of confidence on Moody's part that the gaming sector has returned to a period of long-term stability, and that Affinity demonstrates the ability and willingness to generate positive free cash flow, maintain good liquidity, and operate at a debt/EBITDA level of 6.0x or lower.Ratings could be downgraded if Moody's anticipates renewed weakness in Affinity's earnings or cash flow generation because of competition, actions to contain the spread of the virus, or reductions in discretionary consumer spending. A deterioration in liquidity or sustained high leverage could also lead to a downgrade.Affinity Gaming Corporation is a Nevada corporation, headquartered in Las Vegas, which owns and operates 8 casinos, five of which are located in Nevada, two in Missouri, and one in Iowa. Affinity is a private company that is 100% owned by affiliates of Z Capital and does not disclose its financial information. Net revenue for the last twelve months-ended 31-March 2021 was $214 million.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history. 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