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.




Six Hong Kong residents, three Thais, two mainlanders and one Macau resident have been charged with organized crime, brutal murder and dismembering in relation to the death of Lai King-man, 60, nicknamed "Police Man", Macau's Public Prosecutions Office said yesterday.

The crime is believed to be gang-related. Lai and one of the gang members, last name Ma, had a dispute over money.  On the night of September 6, Lai was dragged from the Venetian Macao casino and held in a VIP room in a restaurant.  He was then stabbed to death and dismembered in what one of the prosecutors described as an "atrocious crime".

Lai reportedly had debts of 2 million yuan (HK$2.27 million) - two decades after he lost the money in an underground casino in Shenzhen.

It is unclear why his creditor, who ran the casino, began to chase the 20-year-old debt last year.

Sports Apparel: Strike 2

Last week was the worst year over year change in sports apparel since July 2008. Everything was down at an alarming rate. Sporting goods retailers fell down by 15%, discount/mass channel declined by 40%, and the recently strong family retailer channel decreased by 10%. I call it like it is, and will VERY rarely pull the weather card. But last week's impact was unmistakable. The average temperature was 6-15 degrees cooler than average across virtually the entire US - with warmer temperatures only in Virginia, Georgia and parts of Texas. I won't even begin to call out the rain, because it rained pretty much everywhere. See weather charts below.


So what does this all mean? While I can explain the week away, it doesn't mean we can ignore the facts - especially given that sales have been weakening since early May, and need to pick up in mid June when seasonal demand should increase. The bottom line is that the June better darn well finish on a great note with some nice pent-up demand, otherwise we're all going to see some GREAT deals on athletic apparel in July. Good for consumers, but bad for the retailers and certain brands.


Sports Apparel: Strike 2 - chart

Sports Apparel: Strike 2 - Daily Weather Records image 1

Sports Apparel: Strike 2 - Departure of Average Temperature from Normal PNG

Sports Apparel: Strike 2 - Table

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German Snapshot


Polls suggest the center-right is gaining momentum and confidence is rising

Fresh off a victory in European Parliament elections, German Chancellor Angela Merkel and her Christian Democratic Union (CDU) party increased her spread over its main challenger, the Social Democratic Party (SPD), based on a weekly Forsa/Stern poll ended June 12th.

While the CDU lost a point to 35% on the prior week, the SPD dropped three points to 21%, and Merkel's most likely coalition partner, the pro-business FDP, gained one point to 15%. The decline of the SPD, led by Foreign Minister Frank-Walter Steinmeier, may reflect the party's inability to win state aid for retail-giant Arcandor, which filed for insolvency last week. 

ZEW published its economic sentiment indices yesterday. The survey said that investor and analysts expectations for economic developments six months ahead increased to 44.8 from 31.1 in May, while current economic conditions improved to -89.7 from -92.8 in May. 

We continue to have a bullish bias on Germany, due in part to the fiscally conservative leadership of Merkel. The latest German CPI number in May mirrored that of the Eurozone at 0.0% on an annual basis. The disinflationary trend on prices (driven by the decline of fuel costs) will help encourage consumers to spend and if the Euro can back down off of $1.40 it will benefit the export-heavy economy. We still expect to see mild growth starting in early '10 as the country works through ~6% GDP contraction this year. Despite a contraction in the unemployment rate in May of 10bps to 8.2%, we believe the number will rise sequentially and provide a headwind for sentiment. Expect employment to remain a focal point coming into elections in late September.

Matthew Hedrick


German Snapshot - eurocpi

The Demographic TAIL


I'm in the midst of writing a post on oil elasticity and as such have been reviewing some interesting research on OPEC's website and happened upon the table below, which outlines projected population growth rates.   Over the course of the next few weeks, we will be officially introducing our third duration, which we will call TAIL.  This duration denotes investment themes of 3 years or more, and, as always, these themes will have a price attached to them.  In the OPEC 2008 World Oil Outlook, which as an aside is an incredibly detailed publication, I found the attached table which outlines population levels and growth for the major regions around the world.  Demographics are clearly in the TAIL, but will be moving into TREND and TRADE in the coming years.  The table is outlined below:

 The Demographic TAIL - dj1

There are a few key takeaways:

  • There are two groups of regions: those taking share in the world population race and those losing share. The regions taking share include: Middle East and Africa, South Asia, OPEC, and South East Asia. The regions losing share include: North America, Western Europe, OECD Pacific, China, Other Europe, and the former Soviet Union.


  • China is the nation losing the most share as it is projected to go from 20.2% of the world's population in 2006 to 17.7% of the world's population in 2030.


  • OECD Pacific, FSU (the former Soviet Union), and Other Europe are the three regions that projected to decline in population from 2006 to 2030; and


  • The three regions with the largest projected growth, Middle East and Africa, South Asia, and South East Asia, are currently 44% of the world's population and over the next ~20 years will contribute 73% of the world's population growth, or 1.2BN people.

Over the course of the coming year, we will be write more TAIL notes, and many of these will have a demographic underpinning.  The global population share shift has implications for consumer spending, energy use, geo-political risks, and product development, to name a few areas.  Both investors and management teams that do not have their focus on the TAIL as it relates to demographic trends are ignoring important fundamental shifts that will drive markets for decades to come.

Daryl G. Jones
Managing Director


Until the fuel rocket was ignited recently, 2009 estimates looked reasonable but we thought 2010 was majorly at risk.  Fuel costs are up 47% since CCL last gave guidance on March 24th.  Q2 guidance of $0.25-$0.27 looks fairly safe but 2009 full year guidance will come down, to no one's surprise.  2010 remains our concern, and not just because of fuel.  Analysts continue to project flat yields in the face of high single digit capacity increases.  That would be quite a v-shaped recovery.  Our 2010 estimate of $1.25 is almost 40% below the Street at $2.08.

Our bias clearly remains on the negative side even given the recent weakness, but not necessarily because of tomorrow's earnings release.  Reduced 2009 guidance is expected but to the extent lower estimates focus investors on the optimistic 2010 sell-side outlook, the stock's valuation may not hold up.  At 19x our 2010 EPS estimate (almost 11x EV/EBITDA) there is precedent for downside.

The following discussion YouTubes management's assertions from the last earnings call and press release, and provides our synthesis.



  • 2Q09 EPS (reduced for Swine Flu): $0.25-$0.27
  • We're inline at $0.25


"We are approximately two-thirds booked for the remainder of 2009, even with the reduced visibility. And based on this, we think our current net revenue yield guidance of down 10% to 12% for the year is reasonable."

  • Given that most of 2009 was already on the books by March 24th,we don't see a lot of risk to the yield guidance (outside of the swine flu impact), especially for 2Q09 as "there is not much inventory left to sell"
  • We believe that discounted prices offered are continuing to bring in booking volumes ahead of 2008 levels

3Q09 guidance: "even with the strong wave season bookings, occupancies are running significantly behind last year. Caribbean occupancies are lower in the double-digit range, with lower pricing in single digits on a year-over-year basis. Alaska occupancies and pricing are substantially lower in the double-digit range. European itineraries are running behind in the single-digit level, but with pricing also substantially lower. So it is clear that the third quarter is shaping up to be an extremely challenging one for our North American brands, with ticket revenues expected to be in the range of 15% to 20% lower on a year-over-year basis."

  • We're interested in how 4Q09 bookings are shaping up as capacity increases are most pronounced but the comps are a lot easier

"For the full year 2009, we have taken our local currency net revenue yield guidance down by approximately 3% to a range now of 10% to 12%. This includes reduced expectations for onboard revenues for the remaining three quarters as a result of the slowdown in consumer spending habits."

  • Aside from the impact of swine flu which the company already lowered guidance for on May 18th we do not expect any material change in yield guidance

Swine flu estimated to impact 2Q09 by $0.05 as a result of the modifications in the cruise itineraries. However CCL left the door open for further impact on back half results:

  • "potential remains for additional financial impact beyond June 15 which could range up to approximately $0.05 per share bringing the estimated total impact to $0.10 per share on full year 2009 results."

"that the fourth quarter, because of the -- we think because of the lower price points -- is booking somewhat better than third quarter's booking because of the higher price points, relatively speaking. It is a relative thing. I don't know if you can glean anything from that at the end of the day, except that that is sort of the phenomena that we see."

  • With the easy comps, in addition to the lower price point, it's hard to see how 4Q09 y-o-y won't be better than 3Q09
  • Expect no change to prior commentary on European pricing holding up. As opposed to last year, the vast majority of European itineraries are bookedby Europeans, which eliminates the cost of a flight and making the vacation a comparative bargain.



"Cruise costs per available lower berth day, for the full year, excluding fuel and in local currency, are projected to be in line with the prior year, up approximately 0.5%."

  • Expect CCL to continue to impress on the cost front

"In current dollars and excluding fuel, our costs are expected to be down 15% to 17%."

  • Both fuel and the dollar have moved against CCL since they last gave guidance

Based on the current spot price for fuel, fuel prices are projected to be $279 per metric ton for 2009 versus $558 per metric ton in 2008, saving us a total of $902 million.

  • As we wrote about in "Fuel could make the glass look half empty" on 6/1/2009, since CCL issued guidance on March 24th IFO 380 has spiked 47% as of yesterday's average spot price.
  • For the 2Q09, we estimate a minimal impact of 2 cents per share, however for the 2H09 we estimate that the increase in fuel costs impacts earnings by $0.22 cents

CCL FX guidance: "Our guidance in 2009 of EUR1.35 and GBP1.45" "the stronger dollar will reduce our costs."

  • Since CCL's guidance, the dollar has weakened against the pound and euro current spot rates are EUR1.38 and GGP1.64, which doesn't help on the cost front but should help on the revenue side


Expect an update on the two new Italian export credits for 2009 worth over $500MM, for the Costa Pacifica and one for the Seabourn Odyssey. As of the last call, the banks had signed these agreements and they were fully committed. CCL was waiting for the issuance of the Italian export credit agency's insurance policy


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