Unlike most of the sell side, I’ve recently focused on the balance sheets of gamers. ASCA has been of particular interest given the proximity to tripping the senior leverage restriction in its credit facility. As I pointed out in the post “ASCA: TOEING THE COVENANT LINE” on 8/14/08, unless the company refinances some of its debt, it is likely to bust a covenant by Q2 2009 if not sooner. ASCA has pulled a few levers as of late to ensure it doesn’t, including cutting costs and maintenance capex. Management knows this is not a sustainable strategy. Its customers are accustomed to a high level of quality and service which will quickly deteriorate under the current low level of spending.

For the aforementioned reasons, look for ASCA to refinance sooner rather than later despite the current credit environment. The least painless approach is to float a subordinated bond indenture. My best guess is an offering of $200 to $250 million at 12%. The rate would be consistent with where Boyd Gaming’s sub debt trades. As shown in the following chart, this scenario results in an EPS hit of $0.10 to $0.20 or roughly 12-25% of my forward 12 month earnings estimate. It could be worse. EPS would be cut in half with a full refinancing of the credit facility or a covenant waiver. A subordinated debt offering buys the company some time. The current, attractive facility does mature in 2010, so the company has a maximum of 2 years left of over earning.

Another topic of interest for ASCA investors is the performance of Ameristar East Chicago following the opening of the new Horseshoe Hammond. It’s only been two weeks but Ameristar may be holding up a bit better than the company expected. We continue to believe property revenues will fall between 5 and 10% at East Chicago and the first two weeks are probably in that range. Stay tuned for more updates.

Sub debt financing will drive EPS lower

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