Full House Resorts, Inc. -- Moody's assigned Caa1 CFR to Full House Resorts, Inc.'s, Caa1 to secured notes; outlook is stable

Rating Action: Moody's assigned Caa1 CFR to Full House Resorts, Inc.'s, Caa1 to secured notes; outlook is stableGlobal Credit Research - 04 Feb 2021New York, February 04, 2021 -- Moody's Investors Service, ("Moody's") today assigned a Caa1 Corporate Family Rating and Caa1-PD Probability of Default Rating to Full House Resorts, Inc. (FHR). A Caa1 was assigned to the company's proposed $300 million senior secured notes due 2028. An SGL-2 Speculative Grade Liquidity rating was also assigned. The outlook is stable.Proceeds from the new notes will be used to redeem all the company's outstanding senior secured notes due 2024, to deposit $180 million into a construction account to fund the expansion and redevelopment of the Bronco Billy's Casino and Hotel, and for general corporate purposes.The following ratings/assessments are affected by today's action:New Assignments:..Issuer: Full House Resorts, Inc..... Corporate Family Rating, Assigned Caa1.... Probability of Default Rating, Assigned Caa1-PD.... Speculative Grade Liquidity Rating, Assigned SGL-2....Senior Secured Notes, Assigned Caa1 (LGD4)Outlook Actions:..Issuer: Full House Resorts, Inc.....Outlook, Assigned StableRATINGS RATIONALEThe Caa1 CFR reflects the long, approximately 24 months, Bronco Billy's construction period, uncertainty related to the level of visitation and earnings at the redesigned property, FHR's modest scale, and exposure to cyclical discretionary consumer spending. Moody's also believes there are structural weaknesses in the debt support that indicate an aggressive financial policy that is a governance risk.These key structural credit concerns include the fact that the project budget does not include an interest reserve specifically designated to support debt service during the construction period, and that there are minimal restrictions in the new secured note indenture on FHL's ability to raise additional debt. The company's ability to take on additional debt is only limited by a 2.0x incurrence-based fixed charge coverage, according to the new note indenture."Despite the fact that FHR is currently generating enough EBITDA from its existing assets to service the pro forma debt, without an interest reserve to support debt service related to the $180 million of Bronco Billy's construction redevelopment and expansion project, the project itself remains exposed to anything that might impair the EBITDA performance of existing assets, or debt service related to any additional debt that the company decides to raise," stated Keith Foley, a Senior Vice President at Moody's."Adding to the risk related to not having an interest reserve, is that we consider the construction period for the redevelopment and expansion project to be relatively long. The project is scheduled to open in late 2022," added Foley.Other risks include the company's relatively small size. On a proforma basis, EBITDA is only expected to be between $80 million and $85 million, a material portion of which is dependent on the successful ramp up of the Bronco Billy's which is not expected to hit the full run rate of projected EBITDA until fiscal 2023.Positive credit considerations include the introduction of sports betting in Indiana and Colorado and the passing of Colorado Amendment 77 both of which will provide a good source of incremental cash flow. Additionally, once completed, Bronco Billy's will be the newest product in the Cripple Creek CO market.The Caa1 assigned to the notes considers that the notes will comprise almost all the debt capital structure of FHR. The company is also expected to have a new $15 million senior secured priority revolver (not rated) in the pro forma capital structure that will be undrawn at closing.The SGL-2 Speculative Grade Liquidity rating, which indicates good liquidity, considers that despite the lack of an interest reserve, cash proceeds from the new senior secured notes will fully fund the planned project based on the company's budget and will be subject to a disbursement agreement. The SGL-2 also incorporates Moody's expectation that FHR can generate between $40 million to $50 million of EBITDA from existing assets. FHR is also expected to have an undrawn $15 million senior secured super priority revolver available. Pro forma liquidity is $54 million, which is comprised of the expected $15 undrawn revolver plus $29 million of pro forma cash above the $10 million expected to be need for cage cash.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. Moody's analysis has considered the effect on the performance of FHR 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.Moody's regards 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 FHR'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 FHR remains vulnerable to the outbreak continuing to spread.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSThe stable rating outlook considers that despite its small size, the company has some level of diversification and has existing assets that generate earnings and positive free cash flow.Ratings could be upgraded once the expansion is complete and FHR demonstrates the ability to cover its fixed charges, generate some level of positive free cash flow, and maintain debt/EBITDA at or below 6.0x.Ratings could be downgraded if there is any delay in construction, the construction budget is increased materially for any reasons, or there is a decline in the company's EBITDA performance from existing assets. A deterioration in liquidity could also lead to a downgrade.The principal methodology used in these ratings was Gaming Methodology published in October 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1244702. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.Based in Las Vegas, FHR operates five casino facilities in Mississippi, Indiana, Nevada, and Colorado. The company's properties include Silver Slipper Casino and Hotel in Hancock County, Mississippi; Bronco Billy's Casino and Hotel in Cripple Creek, Colorado; Rising Star Casino Resort in Rising Sun, Indiana; and Stockman's Casino in Fallon, Nevada. FHR also operates the Grand Lodge Casino at the Hyatt Regency Lake Tahoe Resort, Spa and Casino in Incline Village, Nevada under a lease agreement with the Hyatt organization. Revenue for the 12 months ended September 2020 was approximately $169 million.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. 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For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.At least one ESG consideration was material to the credit rating action(s) announced and described above.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.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.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Keith Foley Senior Vice President Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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