As a follow-up to our posts on gaming debt restructurings and defaults, we are providing a list of recent credit facility amendments in the sector below. With the exception of MGM’s 2nd amendment, the cost of obtaining these amendments appears reasonably low. In other words, banks seem willing to be flexible. MGM’s 2nd amendment only bought the company 2 months yet cost them 100 bps and was pretty restrictive.

On the other hand, ASCA’s amendment was particularly attractive for the company. This is probably the best comp when considering PNK in its eventual negotiations for a higher leverage ratio in its covenant. While PNK doesn’t appear to have an issue currently, the company may brush up against its maximum ratio in 2010.

Summary of recent gaming credit facility amendments:
  • MGM MIRAGE, Amendment 1

    • On September 30, 2008, MGM entered into an amendment to its Credit Agreement.

    • Amendment increased the maximum total leverage ratio to 7.5x beginning in 4Q08 which will remain in effect through 4Q09, with step-downs thereafter.

    • The amendment also revised limitations on secured indebtedness

    • Drawn pricing on leverage above 5.0x was increased moderately
  • MGM MIRAGE, Amendment 2

    • On March 16, 2009, MGM entered into a second amendment to its Credit Agreement.

    • Amendment provided a waiver of non-compliance with the total leverage ratio covenant or interest charge coverage ratio covenant for quarter ended March 31, 2009 quarter waived through May 15, 2009.

    • 300MM repayment of R/C funded balance, which may not be re-drawn

    • 100 bps increase in drawn pricing and establishes a base rate floor of 4.0% and a LIBOR floor of 2.0%

    • Additionally the Amendment restricts MGM and its subsidiaries from:
    - Paying dividends or distributions on, or repurchase equity,
    - prepay outstanding indebtedness
    - make certain investments, including investments in CityCenter above the stated thresholds or if Infinity World Development Corp. fails to make its corresponding investments, or if any obligations under CityCenter’s senior credit facility have been accelerated
    - incur additional debt,
    - incur liens on assets,
    - merge or consolidate with another company, dissolve or liquidate
    - dispose of material assets,
    - create unrestricted subsidiaries and
    - prepay trade payables.

    • On November 13, 2008, Wynn Resorts entered into an amendment to its Credit Agreement.

    • Amendment allows Wynn to make a debt buyback of up to $650 million of loans outstanding.

    • Amendment contained the following relevant provisions:
    – Loans acquired under debt buyback are cancelled and retired immediately upon closing;
    – Loans cancelled and retired are no longer deemed outstanding under Credit Agreement;
    – Wynn has the option to conduct Dutch Auction for loans outstanding.

    • Wynn successfully purchased $625 million of loans at a discounted price of 93.375%, resulting in retirement of $625 million of principal for payment of $596 million on November 26, 2008.

    • On March 13, 2009, Ameristar entered into a third amendment to its Credit Agreement.

    • Amendment increased the maximum permitted leverage ratio and senior leverage ratio beginning the quarter ended September 30, 2008 by 25 to 50bps through maturity

    • Increased the applicable margin by 1.25%

    • Added a new covenant where TTM EBITDA needed to exceed $275MM

    • Existing $500MM subordinated debt limitation was eliminated

    • Amount of Cumulative Capital Expenditures permitted increased to $1.1BN from $1.0BN

    • Permitted Annual Dividends payments decreased from $40MM to $30MM

    • Cumulative amount of stock repurchases permitted decreased from $125MM to $50MM (plus any amount available under the dividend basket)

    • Reclassified the maturing R/C due Nov 2010 as non-extending loan commitments and permitted to request in the future to convert their Non-Extending Revolving loan Commitment to a new Tranche of Extending Revolving Loan Commitments that mature on August 10, 2012 (subject to quarterly $12MM of principal amortization commencing on Dec 2010)
    – pricing would be negotiated at the time of the extension request, but amount is non-negotiable

    • The existing Incremental Commitment Facility was expanded to permit ASCA in the future to obtain Incremental Term Loans that mature on or after 11/10/2012 in order to reduce the Non-Extending Revolving Loan Commitments (Terming out debt permission)

    • $9MM on-time fee paid to lenders

Sporting Goods: Return of the Wild West?

March has been a difficult month for marginal sporting goods players. On the heels of G.I. Joe’s Ch. 11 filing on March 4th, Sportsman Warehouse filed this past weekend. Both companies are based in the Pacific Northwest, a region typically dominated by Big 5 and The Sports Authority. While both companies plan to reorganize under bankruptcy protection, Sportsman’s Warehouse is either selling or closing more than half its original locations.

Presuming Big 5 and TSA have the liquidity to pursue these locations, this could offer up an opportunity to fill out their respective stores bases west of the Mississippi.

If these players bow out, don’t completely count out Dick’s. For those who might have missed Dick’s remarks on the Q4 earnings call, they specifically identified G.I. Joe’s filing as a potential opportunity to move into that area and hinted at another in distress (i.e. Sportsman’s). With several states “up for grabs” in terms of a market share leader, we could see a return of the Wild West as Big 5, TSA and Dick’s grab for share.

As a sidenote, among the list of unsecured creditors is Columbia at #22 with $628k at risk, or just over $0.01 per share. We note that the company also has roughly $0.02 at risk related to the G.I. Joe’s filing in a quarter where it guided to $0.06. We have earnings closer to $0.20.

Casey Flavin
Sportsman Warehouse Locations (67): The company plans to operate 29 stores during the restructuring process recently sold 15 stores, and plans to close another 23 stores.
G.I. Joe’s Locations (31):

Quadrants Don’t Lie

With earnings season largely past, let’s do a post-mortem to see where each apparel/footwear name is in its earnings cycle. The bottom line is that we continue to see net positive change. You all know our quadrant analysis – if not you should. It is a great way to gauge a management team’s behavioral make-up when presented with challenges to their respective operating models. Do they tend to over-order inventory? Are they proactive vs. reactive in clearing it out? We keep this warehoused in detail for almost 100 retail-related companies. Some key call outs (in the following graph) are as follows…

Quadrant 1: This is where sales are growing faster than inventory, and margins are positive. The percent of companies falling into this basket went from 23% to 6%. Counter to what might initially seem to be the case, this is quite bullish. Statistically, the best shorts are sourced in this quadrant. ROST is the one that stands out to me here as being the most vulnerable.

Quadrant 3: This quadrant is the inverse of Q1. Inventory is building AND margins are off. Some of the worst companies can spend years in this quadrant. But it is also the source of some of the best longs, as the next move (within 2 quarters) is historically a move into Q4 (margins off, but the balance sheet gets clean). Names that stand out to me include Bed, Bath and Beyond, Hibbett, J Crew, Under Armour, Ralph Lauren and Liz Claiborne. This quarter, we saw 63% reside here vs. 46% last quarter.


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Putting This Rally into Perspective

Retail stocks ripping 15% month-to-date is not simply a function of the market’s performance. Our call has been for a fundamental improvement in the delta on nearly every line of the P&L and operating cash flow statement. I still think that holds (note, I don’t need an improvement in the consumer to make this work). But more near-term, we’re already starting to see the stocks move more tightly with earnings revisions, which have – without question – been getting better. I think that will continue for a while as downward revisions for the industry in aggregate prove to have bottomed.



• Financial situation began to deteriorate in 2007 with new competition, collapse of the housing bubble, smoking ban passage, and weakening economic environment

• Requested a waiver of financial covenants under its Senior Revolving Credit Facility in July 2007
– By 3Q07 route gaming EBITDA was down 46% and casino EBITDA was down 22% (y-o-y), and down 37% and 17% YTD, respectively.
– Amendment completed on 12/14/2007

• In February 2008, Herbst hires Goldman to evaluate strategic alternatives (recapitalization, refinancing, restructuring, reorganization)

• On March 11, 2009 Herbst reached an agreement with the majority of its lenders to accept its proposed pre-packaged Chapter 11 plan
– Casino and slot business split into two separate holding companies
– Herbst family will receive 90% of new plan equity in the slot route company in exchange for contribution of the new gaming device license agreement
– Conversion of the Senior Credit Facility into debt and equity of the reorganized companies, with bank lenders getting 100% of the equity in the new casino company and 10% of the new equity in the slot company
– Termination of the company's 8.125% Senior Subordinated Notes and 7% Senior Subordinated Notes and cancellation of all existing equity in the company.

Shark Bite, Part Deux: SP500 Levels, Refreshed...

There is nothing quite like the most expedited 2-week short squeeze that we have seen in the US stock market since 1939.

Political calendar catalysts from here?

1. Geithner speaks tomorrow (House Financial Services Committee) – could easily be a negative
2. Bernanke speaks tomorrow (House Financial Services Committee) – could easily be a positive
3. Obama has an 8PM nationally televised speech tomorrow – heck, the guy is the new Warren Buffett with his “market is a bargain call”

Economic calendar catalysts from here?
1. New Home Sales = Wednesday
2. Michigan Consumer Sentiment = Friday
3. Morgan Stanley kicks off reporting for the bankers

Quantified Risk Management catalysts from here?
1. Price momentum = SP500 TRADE resistance at 817; TREND resistance at 829
2. Price
3. Price

That’s right – despite the Oracle of Obama’s “bargain” call this market doesn’t move on valuation, it moves on price. Everything else is part of a macro mosaic where we need to stay with the proactively risk management process, because no matter where you go in this market, there those prices are.

SP500 support continues to build to higher lows. Now I’m a buyer in the SP500 range of 753-768 (see green waters below, and beware of the Shark).

Keith R. McCullough
CEO & Chief Investment Officer

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