Gateway Casinos & Entertainment Ltd. Downgraded To 'B-' From 'B' And Put On CreditWatch Negative On COVID-19 Uncertainty

  • The COVID-19 outbreak has resulted in the shutdown of casinos in the provinces of Ontario, Alberta, and British Columbia (B.C.). There is significant uncertainty on when they will reopen and whether the after-effects of social distancing will continue to weaken traffic.
  • We believe B.C.-based casino operator Gateway Casinos & Entertainment Ltd. might record significant near-term revenue and profit losses.
  • As a result, S&P Global Ratings lowered its long-term issuer credit rating on Gateway to 'B-' from 'B' and placed the ratings on CreditWatch with negative implications.
  • At the same time, we lowered our ratings on the company's senior secured debt to 'B+' from 'BB-' and second-lien debt to 'CCC' from 'CCC+'. The recovery ratings on both are unchanged.
  • The CreditWatch placement reflects the potential for another downgrade given the macroeconomic uncertainty and whether there will be a longer-lasting negative effect from the COVID-19 outbreak on Gateway's cash flow and liquidity.
TORONTO (S&P Global Ratings) March 26, 2020--S&P Global Ratings today took the rating actions listed above. Gateway entered 2020 with S&P Global Ratings-adjusted net leverage of about 8x, which, given current industry conditions, we do not expect will improve. Since the week of March 16, 2020, following the Ontario, Alberta, and B.C. governments' announced states of emergency, casinos have been closed. An emphasis on social distancing could also result in weaker traffic, even if the closures are short-lived. We estimate that revenues could decline by at least 10%-15% for 2020, which assumes a slow recovery starting later in the year, leading to adjusted leverage remaining well above 8x over the next year. The ability to contain the coronavirus, the duration of current shutdowns, and consumers' willingness to isolate, are key variables. As a result, there is significant uncertainty about the duration of the coronavirus' impact on the gaming market and Gateway's cash flow.
Given the current challenging market conditions and weak oil prices, we have also made the assumption that Gateway will be hard pressed to sell its Edmonton properties. Therefore, we have consolidated both the lease liabilities and negative cash flow from the Edmonton properties into our EBITDA and leverage calculations. We also assume that the business combination between GTWY Holdings Ltd. (the holding company that owns a 100% equity interest in Gateway) and Leisure Acquisition Corp., a special purpose acquisition company, will be completed in the second quarter of 2020, which would lower gross debt by about C$215 million.
The CreditWatch placement reflects the potential for a downgrade over the next few months, though given the uncertainty about the duration of the outbreak, including the potential for it to recur after the summer, the rating could remain on CreditWatch until near the end of the calendar year. We expect to resolve the CreditWatch placement following our assessment as to whether the already weak leverage measures or liquidity, in the face of high fixed charges, are likely to deteriorate over the next year.
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