Brunswick just raised $250 million in 5 year notes to pay off its floating rate borrowings due in 2009. It was the classic rate vs. liquidity trade-off I’ve been talking about. Yes, BC is now liquid but at a cost of 5-5.5% or $12.5m to $13.8m in incremental borrowing costs. I’m not making a call on BC. Rather, this is a real world illustration of what is likely to happen to some of the gaming companies, particularly ASCA and MGM. Last I checked, analysts are generally projecting current low borrowing rates in perpetuity.
I know. Brunswick is not a gaming company and doesn’t own hard assets so its borrowing rate could be higher than casino operators. However, BC is free cash flow positive and maintains a ton of cash and low leverage, unlike virtually every gaming operator. The obvious exception, of course, is PENN which remains our favorite stock.
ASCA is of particular interest in that this company negotiated one of the most attractive credit facilities, which is contributing to the lowest cost capital structure in the gaming industry (see the chart). The problem is the credit facility matures in 2010 (the earliest among the operators) and right now comprises almost all of the company’s debt structure. You can bet ASCA will be looking for liquidity at the next open credit window. My guess is long term fixed rate debt to offset its overreliance on variable rate debt. In my “GAMERS OVEREARNING: REFIS TO KNOCK EPS DOWN, ASCA AND MGM AT RISK” post on 8/10/08 I noted that ASCA’s EPS could be cut in half with a credit facility refinancing 3-4% higher. Obviously, to the extent the company opts for the safety and liquidity of long-term fixed rate debt, the EPS impact may be greater.
I know. Brunswick is not a gaming company and doesn’t own hard assets so its borrowing rate could be higher than casino operators. However, BC is free cash flow positive and maintains a ton of cash and low leverage, unlike virtually every gaming operator. The obvious exception, of course, is PENN which remains our favorite stock.
ASCA is of particular interest in that this company negotiated one of the most attractive credit facilities, which is contributing to the lowest cost capital structure in the gaming industry (see the chart). The problem is the credit facility matures in 2010 (the earliest among the operators) and right now comprises almost all of the company’s debt structure. You can bet ASCA will be looking for liquidity at the next open credit window. My guess is long term fixed rate debt to offset its overreliance on variable rate debt. In my “GAMERS OVEREARNING: REFIS TO KNOCK EPS DOWN, ASCA AND MGM AT RISK” post on 8/10/08 I noted that ASCA’s EPS could be cut in half with a credit facility refinancing 3-4% higher. Obviously, to the extent the company opts for the safety and liquidity of long-term fixed rate debt, the EPS impact may be greater.
ASCA has been over earning due to unsustainably low borrowing costs
