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Jacobs Entertainment, Inc. -- Moody's upgrades Jacobs Entertainment's CFR to B2, rates proposed notes B2; outlook stable

·17 min read

Rating Action: Moody's upgrades Jacobs Entertainment's CFR to B2, rates proposed notes B2; outlook stableGlobal Credit Research - 24 Jan 2022New York, January 24, 2022 -- Moody's Investors Service ("Moody's") upgraded Jacobs Entertainment, Inc.'s ("Jacobs") Corporate Family Rating ("CFR") to B2 from B3 and Probability of Default Rating to B2-PD from B3-PD. A B2 was assigned to the company's proposed $500 million senior unsecured notes due 2029. The company's existing senior secured second lien notes were upgraded to B2 from B3. The company's outlook is stable.Proceeds from the proposed $500 million of senior unsecured notes will be used to refinance the company's existing second lien notes outstanding, partially finance further remodeling and improvements at the company's Sands Regency property, as well as pay related premiums and expenses. At the close of the transaction, Moody's expects to withdraw the ratings on the company's existing second lien notes due 2024.The upgrade of Jacobs' CFR to B2 considers the improvement in operating performance since the company's casinos have reopened including positive free cash flow generation and a reduction in debt-to-EBITDA to below 4.0x as of September 2021. The company has been able to improve EBITDA margins significantly and increase absolute EBITDA levels above pre-pandemic levels. Moody's believes the company has the capacity to withstand an increase in debt from the proposed notes offering, which will increase debt-to-EBITDA leverage to approximately 4.8x on a proforma basis as of September 2021, and also has cushion to withstand a partial reversal of the margin gains, should such pressure arise over time, and still maintain debt-to-EBITDA leverage below 5.5x, supporting the upgrade to B2. Free cash flow will be weaker in 2022 and 2023 because capital spending will increase to fund the renovations at the company's Sands Regency property, but this development capital is being prefunded with this note offering, providing ample liquidity for the company.Moody's took the following rating actions on Jacobs Entertainment, Inc.:Upgrades:..Issuer: Jacobs Entertainment, Inc..... Corporate Family Rating, Upgraded to B2 from B3.... Probability of Default Rating, Upgraded to B2-PD from B3-PD....Gtd Senior Secured 2nd Lien Notes, Upgraded to B2 (LGD4) from B3 (LGD4)....Senior Secured 2nd Lien Global Notes, Upgraded to B2 (LGD4) from B3 (LGD4)Assignments:..Issuer: Jacobs Entertainment, Inc.....Gtd Senior Unsecured Global Notes, Assigned B2 (LGD4)Outlook Actions:..Issuer: Jacobs Entertainment, Inc.....Outlook, Changed To Stable From NegativeRATINGS RATIONALEJacobs' B2 Corporate Family Rating reflects its high leverage, the company's relatively small scale in terms of revenue relative to peers, and high earnings concentration with nearly 80% of EBITDA coming from two markets, Colorado and Louisiana. The rating is supported by the good market position of Jacobs' revenue generating assets within its operating regions, certain barriers to entry in the Louisiana market due to laws that limit the locations of new direct truck stop operators -- this provides Jacobs with a certain level of earnings stability -- and regional growth in the Reno, NV market where the company owns two land-based casinos. The company's good liquidity profile also supports the rating, with access to a new $80 million revolver that is expected to remain undrawn.The coronavirus outbreak and the government measures put in place to contain it continue to disrupt economies and credit markets across sectors and regions. Although an economic recovery is underway, the recovery is tenuous, and continuation will be closely tied to containment of the virus. As a result, a degree of uncertainty around our forecasts remains. 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, Jacobs remains vulnerable to a renewed spread of the outbreak. Jacobs also remains exposed to discretionary consumer spending that leave it vulnerable to shifts in market sentiment in these unprecedented operating conditions.Additional social risks for gaming companies includes high taxes and operating restrictions imposed by governments to mitigate the effects of problem gambling, and evolving consumer preferences related to entertainment choices and population demographics that may drive a change in demand away from traditional casino-style gaming. Younger generations may not spend as much time playing casino-style games (particularly slot machines) as previous generations. Data security and customer privacy risk is elevated given the large amount of data collected on customer behavior. In the event of data breaches, the company could face higher operational costs to secure processes and limit reputational damage.The company is exposed to corporate governance risk given the private ownership structure by Jeffrey P. Jacobs and family and an aggressive financial strategy. Jacobs' financial policy has been to grow the existing business and invest in new gaming opportunities at the direction of the owner. Distributions to ownership are limited by the terms of the company's debt instruments; although distributions for taxes are allowed. The company has maintained leverage and coverage within a range commensurate with the rating over the past several years.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSThe stable outlook considers the recovery in the company's business and margin improvement exhibited since reopening, and the expectation for sustained revenue improvement with potential for some margin deterioration in 2022. The stable outlook also incorporates the company's good liquidity and the expectation for leverage to continue to come down from current levels as the business continues to recover.Ratings could be downgraded if there is a decline in EBITDA performance from factors such as volume pressures or higher operating costs, liquidity deteriorates, or the company is unable to sustain debt-to-EBITDA below 5.5x. Acquisitions or shareholder distributions that increase leverage could also lead to a downgrade.Ratings could be upgraded if the company generates consistent and comfortably positive free cash flow, revenue is growing, debt-to-EBITDA is sustained below 4.0x, and the company adheres to financial policies that maintain low leverage.The principal methodology used in these ratings was Gaming published in June 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1276316. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.Jacobs Entertainment, Inc. is a privately held company that does not disclose financial information publicly. The company owns and operates gaming facilities located in Colorado, Nevada and Louisiana. The company owns six land-based casinos: The Lodge Casino and the Gilpin Casino, both in Black Hawk, CO; the Sands Regency and the Gold Dust West Casino in Reno, NV; the Gold Dust West-Carson City in Carson City, NV and the Gold Dust West-Elko in Elko, NV. Jacobs also owns and operates 26 video poker truck stop facilities in Louisiana. Additionally, the company has operations in Cleveland, Ohio that include an aquarium, parking, a 4,700 seat covered outdoor amphitheater, and a dinner cruise and entertainment ship. The company is a wholly-owned subsidiary of Jacobs Investments, Inc. (JII). Jeffrey P. Jacobs, the Chief Executive Officer and his family trusts own 100% of JII's outstanding Class A and Class B shares. Revenue for the 12 months ended September 2021 was approximately $411 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. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. 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 http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.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. Adam McLaren Vice President - Senior Analyst Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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