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Midwest Gaming Borrower, LLC -- Moody's assigns B2 CFR to Midwest Gaming; outlook is stable

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Rating Action: Moody's assigns B2 CFR to Midwest Gaming; outlook is stableGlobal Credit Research - 12 Apr 2021New York, April 12, 2021 -- Moody's Investors Service today assigned a B2 Corporate Family Rating and B2-PD Probability of Default Rating to Midwest Gaming Borrower, LLC (MGB). A B3 was assigned to the company's proposed $750 million of 8-year senior secured notes. The rating outlook is stable.In conjunction with the notes offering, MGB, which owns and operates Rivers Casino Des Plaines in Des Plaines, Illinois, is entering into a new $150 million 5-year priority secured revolving credit facility, approximately $30 million of which will be drawn at closing. The revolver, which is not rated, shares the same collateral as the notes although the revolver has priority repayment rights over the notes. Proceeds from the senior secured notes offering and initial revolver draw will be used to repay MGB's existing debt in full. Based on Moody's estimates, pro forma debt/EBITDA applying an annualized EBITDA run rate is approximately 4.5x.The following ratings/assessments are affected by today's action:New Assignments:..Issuer: Midwest Gaming Borrower, LLC.... Corporate Family Rating, Assigned B2.... Probability of Default Rating, Assigned B2-PD....Senior Secured Notes, Assigned B3 (LGD4)Outlook Actions:..Issuer: Midwest Gaming Borrower, LLC....Outlook, Changed To Stable From Rating WithdrawnRATINGS RATIONALEMGB's B2 Corporate Family Rating reflects that MGB has maintained its number one market share position based on gross monthly gaming revenue in the densely populated Chicagoland gaming market since May 2016. MGB's good location in the northwest Chicago suburb of Des Plaines and strong reinvestment in the property should sustain solid EBITDA and operating cash flow. The company has been able to maintain the market position despite increased competition that has occurred during the last five years, including the implementation of Video Gaming Terminals in Illinois. The company's moderate leverage, and incremental EBITDA contribution from an $87 million expansion (excluding licensing fees) that began this March, and positive, albeit modest, free cash flow profile also support the credit profile.Moody's estimates MGB will generate annual free cash flow of between $10 million and $15 million in each of the next two fiscal years, and that the company MGB will demonstrate the ability and willingness to adhere to its target net debt/EBITDA leverage of less than 5x. Moody's assumes in the rating that MGB will be able to retain most of the significant increase in EBITDA margin generated during periods when the facility was open over the last year. Moody's anticipates revenue will not return to pre-coronavirus levels until 2022, but anticipates uplift of EBITDA margin improvement from cost management and improved operating expenses will lead to mid 4x debt/EBITDA. Moody's views as sustainable cost savings from eliminating non-profitable amenities, and greater efficiency in labor and marketing. The proposed expansion and sports gaming opportunities should also lead to higher EBITDA than generated prior to the pandemic. Operating performance has been volatile over the last year with the facility experiencing coronavirus-related shutdowns from March 15 -- June 30 and again from November 20 -- January 18 and at other times has operated under reduced capacity limits imposed by Illinois.Key credit concerns include MGB's single asset profile and expectation of additional competition in the next few years -- four additional gaming facilities are expected to come online in the Chicagoland market in the next five years -- along with continued, albeit lessened, concerns regarding the potential impact from any increased restrictions related to social distancing requirements. Additionally, MGB's pro forma and projected debt structure only has a very small amount of pre-payable debt. As a result, any improvement in leverage will need to be driven by higher EBITDA performance.The B3 rating on the proposed senior secured notes is one-notch lower than MGB's Corporate Family Rating. The notes have a subordinated lien on the collateral relative to the priority secured revolver. Moody's expects the revolver will be partially utilized given the initial approximately $30 million draw as well to temporarily help fund the expansion.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 MGB 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 MGB'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 MGB remains vulnerable to the outbreak continuing to spread.Moody's considers the company's financial policy as moderate. MGB targets net debt/EBITDA of 4.0x or below, and no greater than 5.0x as an upward bound.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSMoody's assumes in the stable rating outlook that social distancing restrictions will not worsen, that further temporary closures will not occur, and that MGB will maintain most of the significant EBITDA margin improvement achieved during periods over the last six-to-nine months when the facility was open. Also considered is MGB's good liquidity characterized by modest free cash flow, no near-term debt maturities -- the revolver expires in five years and the secured notes mature in 8 years -- and significant availability under the $150 million revolver despite anticipated drawings. Also, covenant compliance is not expected to be an issue. MGB is subject to a maximum total leverage ratio of 6.00:1.00 with step downs to 5.50:1.00 for all periods from and after March 31, 2023, the calculation of which will exclude quarters where the casino was not fully operational due to a temporary closure related to COVID.A higher rating can be achieved once Moody's has a higher degree of confidence that the risks related to COVID-19 will lessen and the operating environment improves along with revenue and earnings visibility. A higher rating also requires that MGB generate significant positive free cash flow and demonstrate the ability and willingness to achieve and maintain debt/EBITDA below 4.0x over the longer-term. Ratings could be downgraded if earnings decline or liquidity deteriorates because of actions to contain the spread of the coronavirus, consumer spending on gaming activities weakens, or the company is unable to maintain the recent EBITDA margin improvement. From a quantitative perspective, ratings could be lowered if MGB's leverage on a gross debt/EBITDA basis exceeds 5.0x for an extended period of time.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.Midwest Gaming Borrower, LLC owns and operates Rivers Casino Des Plaines in the Chicagoland market, featuring 1,008 slot machines and 69 table games. Midwest is co-owned by Churchill Downs Incorporated and Rush Street Gaming, LLC. The company's revenue is less than $300 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 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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