ASCA announced today that it had negotiated covenant relief. More restrictions were put in place but the main cost was 125bp increase the rate and $9 million dollar amendment fee. In return, the banks raised the senior leverage covenant by 0.50x to 1.25x depending on the quarter. Per our model, this puts ASCA in the clear at a modest price, about $0.20 in annual EPS.

Due to the leverage step down in Q2 and again in Q3, we had ASCA tripping its senior leverage covenant in Q2. Now, ASCA would seem to have ample room as seen in the first chart. Investors must be cognizant, however, of a new covenant that requires ASCA to maintain minimum consolidated trailing twelve month EBITDA of $275 million. We are currently projecting 2009 EBITDA (per the covenant calculation) of $328 million. Other, less important, changes include a smaller basket for dividends and share repurchases.

While Street EPS estimates need to come down to reflect the higher interest cost, Street EBITDA estimates look too low. Yes, I actually stated that a gaming company is likely to exceed EBITDA estimates. Favorable regulatory changes in Missouri and Colorado and stabilizing demand in most of the regional markets. For once, the analysts were conservative enough. ASCA is really starting to capitalize on the $500 loss limit removal. Look for more effecting marketing efforts to drive incremental demand and better margins. The Street may be over $10 million too low on 2009 EBITDA.

With only two more quarters of development Capex, ASCA has got the makings of a cash machine. The second chart details free cash flow and free cash flow yield on a TTM basis. Net free cash flow should turn positive in Q3 2009 and escalate from there to almost $150 million annually. The FCF yield could exceed 20%.

Gaming is a strong cash generative business with high barriers to entry. Demand is less sensitive than most consumer discretionary sectors. Most gamers egregiously exploited the easy money era and many won’t survive the current environment. The survivors will face less competition, higher cash flows as Capex has been scaled back, and consequentially, higher valuations. ASCA looks like it has entered the survivor pool.

ASCA maintains significant cushion under the new leverage covenant
Significant free cash flow potential

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