Moody's assigns Stockbridge/SBE Holdings B3 CFR; outlook stable
Approximately $300 million of rated debt affected
Moody's Investors Service today assigned a B3 Corporate Family Rating rating to Stockbridge/SBE Holdings, LLC (SBE) and a (P)B2 rating to its proposed $300 million first lien term loan. Upon receipt and review of the final documents, the provisional designation will be removed and concurrently, a B2 rating will be assigned to the first lien term loan.
The net proceeds of the first lien term loan, sponsor equity of approximately $329 million ($299 million contributed to date and $29 million to be contributed at closing), and to-be-raised junior debt (not less than $115 million) will be used to finance the renovation, construction, and development of SLS Las Vegas. SLS Las Vegas is a casino and hotel resort located on the north end of the Las Vegas Strip (the "Project") scheduled to open in the second quarter of 2014. The prospective rating is subject to review of final terms and conditions and incorporates an assumption that within the next six months SBE successfully raises a minimum of $115 million of junior debt that is required to finance completion of the Project.
Until the junior financing is raised, the net proceeds of the first lien term loan will be placed in escrow for up to six months while the issuer seeks to raise the junior capital. If SBE successfully raises the junior debt at a blended cash cost no greater than 6%, the escrow will be released to the disbursement agent to fund the Project. If SBE is unable to raise junior debt at a blended cash cost no greater than 6%, amounts funded into escrow (exclusive of the original issue discount plus accrued interest) will be returned to the first lien term loan lenders. SBE will establish an interest reserve at closing (with equity) to fund six months of interest on the first lien term loan while it is held in escrow.
The issuer is targeting to obtain low cost junior debt through a federal program sponsored by the U.S. Citizenship and Immigration Services under the U.S. EB-5 visa immigrant investor program. If SBE is unable to raise funds through this program, it can obtain other junior priority, unsecured, mezzanine financing, preferred or common equity with a blended cash rate of no more than 6% per annum. Moody's notes per these terms, it is possible for SBE to raise junior capital at a total cost greater than 6%.
SBE's B3 Corporate Family Rating reflects the risk associated with the renovation and ramp-up of a hotel-casino, the company's modest scale and reliance on a single property for all of its cash flow. The ratings also consider the limited gaming experience of the sponsors and the need to take share from existing well established properties on the Las Vegas Strip in order to meet its business plan.
In addition to these risks, the ratings also reflect Moody's expectation that leverage will be high and interest coverage modest assuming that the project ramps up more slowly than management anticipates. Despite the relatively high amount of equity contributed to this project, Moody's expects pro-forma debt/EBITDA and EBITDA/interest, including Moody's standard adjustments, to approximate 7.0 times and 1.5 times, respectively, at the end of 2015 -- the first full year of operations.
Positive rating consideration is given to the company's very good liquidity profile, including a six month escrow interest reserve and 24 month funded cash interest reserve (3 months past completion). Additionally, little new supply is expected to enter the market, the Project is targeted at what Moody's believes is an underserved market segment on the Las Vegas Strip -- just below luxury, and sbe Entertainment has a successful track record establishing popular hotel, restaurant and nightlife venues. These positive elements, along with the existing databases of sbe Entertainment customers and patrons of the Sahara before its closure, reduce the risk of a slow ramp up upon opening relative to other single property casino developments.
The rating outlook is stable reflecting Moody's view that the Project has sufficient liquidity to reach completion and that the market can absorb the new supply.
Ratings could be downgraded if the terms of the to-be-raised junior debt are more expensive than currently contemplated, the Project encounters cost over-runs or delays that would negatively impact liquidity or the issuers ability to cover interest once the interest reserve is exhausted. Ratings could also be downgraded if visitation trends to Las Vegas or gaming trends deteriorate prior to opening.
Upward rating momentum is not expected given the construction and start-up nature of the Project. However, ratings could be considered for upgrade over time if the Project is completed on-time, on budget, and hits its targeted rate of return.
Corporate Family Rating at B3
Probability of Default Rating at B3
$300 million senior secured first lien term loan at (P)B2 (LGD 3, 38%)
Stockbridge/SBE Holdings LLC ("SBE") is a joint venture between Stockbridge Real Estate Funds (90% ownership interest) and sbe Las Vegas Holdings I, LLC (10% ownership interest). SBE is redeveloping the Sahara Hotel and Casino in Las Vegas. The new project will be called SLS Las Vegas.
The principal methodology used in rating Stockbridge/SBE Holdings, LLC was the Global Gaming Industry Methodology published in December 2009. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009.
- New York
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