Parq Holdings L.P. Downgraded To 'CCC' From 'B-' On Operational Underperformance, Outlook Negative

  • Vancouver, B.C.-based casino operator Parq Holdings L.P.'s higher fixed operating costs has led to lower-than-anticipated EBITDA generation.
  • We now believe Parq's adjusted EBITDA interest coverage ratio will not materially improve from our expectations of below 0.5x for 2019, which makes the company vulnerable to a balance-sheet restructuring, absent an unanticipated equity injection by its owners.
  • As a result, S&P Global Ratings lowered its issuer credit rating on Parq to 'CCC' from 'B-'.
  • At the same time, we lowered our issue-level rating on the company's senior secured first-lien debt to 'B-' from 'B+'. The '1' recovery rating on these obligations is unchanged.
  • The negative outlook reflects our view of the risks surrounding the company's ability to meaningfully increase its EBITDA and sustain sufficient liquidity to cover high-fixed charges.
TORONTO (S&P Global Ratings) April 15, 2019--S&P Global Ratings today took the rating actions listed above. The downgrade reflects our view that Parq's inability to meaningfully improve its profitability against a high and expensive debt burden will continue to pressure liquidity, and eventually make the company vulnerable to a balance-sheet restructure. Although the company is expected to post strong revenue growth (up about 160% for 2018) from its new properties, Parq's operating expenses for the period are up almost three times driven by its larger new facility, which carries a high fixed cost (the company had almost the same number of gaming units as its previous old facility, Edgewater). As a result, we expect the company's adjusted EBITDA to be C$20 million-C$25 million in 2018, which is notably lower than our previous expectation of C$35 million-C$40 million. Even assuming some improvement in fiscal 2019 (estimated C$35 million-C$40 million), we believe the company's cash flow will be insufficient to cover its fixed charges.
In our opinion, the company's lower EBITDA level will ultimately lead to an unsustainable balance sheet given an adjusted debt-to-EBITDA ratio above 15x, and adjusted EBITDA interest coverage below 0.5x over the next 12 months. Given the operational underperformance and ensuing cash flow shortfall, the company amended its credit facilities, waiving its financial covenants and deferring its second-lien debt interest payment due March 31, 2019, to April 30, 2019. While we recognize that Parq is in the process of refinancing its current capital structure by April 30, which would alleviate the risk of payment default and covenant breach on its existing debt obligations, we still believe that, absent a debt recapitalization, the company will be unable to materially address its high fixed charges and financial sustainability. Furthermore, Parq's ability to pay the first-quarter 2019 second-lien interest payment by April 30, 2019 (the 30-day grace period as per the bank agreement), hinges on the company's ability to refinance its debt.
The negative outlook reflects the potential for a downgrade on Parq in the next 12 months spurred by increased risk surrounding the company's ability to materially increase its EBITDA and execute on a sustainable refinancing strategy. In our opinion, there is a risk of a payment default or a debt restructuring could occur within the next 12 months.
We could lower the ratings in the next 12 months if the company cannot execute on its proposed refinancing, which could lead to payment default and covenant breach. Alternatively, we could also lower the ratings if Parq announces a distressed debt exchange or debt restructuring in which lenders would receive less than par.
We could revise the outlook to stable over the next 12 months, if the company is successful in executing on its refinancing of its existing credit facilities, which could eliminate the risk of a payment default or covenant breach along with sustainable cash flow growth to cover its fixed charges.
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