PNK is known for its development. Not that the company is a bad operator. It's just that they've developed some of the nicest regional properties including Lumiere Place, L'Auberge Du Lac, and Belterra. Of course, you cannot build without financing and Dan Lee and company have been very adept at raising debt and equity over the years to fund these projects. They will have to do it again, this time with a new bank facility and a sub or senior bond deal. Although with these guys, you can never rule out an equity deal (highly unlikely at this stock price).
PNK's current bank facility matures in December 2010 and the leverage covenant will likely bust in Q1 2010. A new facility, amendment, or extension is a certainty. The company also has about $400 million worth of senior subordinated bonds maturing in 2012 and 2013. We believe the most likely course of action involves a new credit facility finalized over the next month or two, followed by a large bond deal. Some observations:
- PNK probably cannot start Sugarcane Bay without having the money to finish it and cover the overhang of the 2012 notes maturing - that would just be very risky in this market
- They have to get rid of the 2013s because the indentures really strap the company's ability to use the credit facility. A covenant in the 2013s prevents PNK from drawing more than $350 million on the credit facility unless the Consolidated Coverage Ratio rises above 2.0x on a pro forma basis.
- If the company is going to refinance the 2013s they may as well get rid of the 2012s. If they don't, they still have the issue of using the R/C to pay off the maturity and doing yet another deal in 2011
- In the current environment, we come up with a rate of 10.5% on the new $600MM of notes as the current ones are trading at a yield of 10.6%. Even though they are called Subordinated, they are effectively Seniors given the restrictions on additional leverage - so when those go away new debt should price higher, or as high, even if it's called "senior"
- The bank market is the most constrained so if they downsize the credit facility from $650 million to $450 million, they can probably get all in pricing around 6%
- The only reason not to get rid of the notes is if they think they can get above 2.0x Consolidated Coverage Ratio. PNK might move above 2.0x over the next few quarters, but could also miss their opportunity to tap the current opening of the high yield markets. Also, proceeding with Sugarcane may preclude them from doing that in any event.
With those thoughts in mind, we've come up with the following assumptions:
- 1) PNK closes on a new $450MM credit facility early in Q3 2009. We are assuming a rate @ L +4%, with a 2% floor. Currently PNK is borrowing at LIBOR +2%, or around 3.5% currently. With the floor in place, PNK's effective rate rises 2.5% under our assumption.
- 2) After the new credit facility is arranged, PNK retires the 2012 (8.25%) & 2013 (8.75%) senior subordinated bonds with a new $600MM deal @10.5%.
The following chart shows where we shake out relative to the Street. Our revenue and EBITDA estimates are pretty much in-line, but EPS is below. Clearly, the Street hasn't made the appropriate cost of capital adjustments.