Moody's Upgrades Isle of Capri's (ISLE) Corp. Family Rating to 'B1'; Sees Operating Improvement as Sustainable

Moody's Investors Service raised Isle of Capri Casino, Inc.'s (Isle)(Nasdaq: ISLE) Corporate Family Rating to B1 from B2. The company's Probability of Default Rating and issue-level ratings were also upgraded, including a one-notch upgrade of Isle's $350 million senior subordinated notes due 2020 to B3 from Caa1. Moody's assigned an SGL-2 Speculative Grade Liquidity Rating to Isle. The rating outlook was revised from positive to stable.

Ratings upgraded:

Corporate Family Rating, to B1 from B2

Probability of Default Rating, to B1-PD from B2-PD

$300 million revolver due 2018, to Ba1(LGD1) from Ba2(LGD1)

$500 million 5.875% senior notes due 2021, to B1(LGD3) from B2(LGD3)

$350 million 8.875% senior subordinated notes due 2020, to B3(LGD5) from Caa1(LGD5)

Rating Assigned:

Speculative Grade Liquidity Rating, at SGL-2

RATINGS RATIONALE

"The upgrade acknowledges Isle's success at improving its financial and operating risk to a level we believe is sustainable, and prepares the company for the significant and complex challenges that face US regional gaming operators in general," stated Keith Foley, a Senior Vice President at Moody's.

A stabilization in monthly gaming revenue trends throughout the US, accompanied by a lower and more efficient cost structure and absolute debt reduction every quarter since the company's April 30, 2014 fiscal year-end, has enabled Isle to reduce adjusted debt/EBITDA to about 4.9 times. This leverage is below the 5.0 times trigger required for a higher rating and lower than the adjusted debt/EBITDA of other large, diversified gaming issuers, including Boyd Gaming Corporation (B2 stable), MGM Resorts International (B2 stable), Peninsula Gaming, LLC (B2 stable), and Pinnacle Entertainment, Inc. (B1 stable).

"These improvements also position Isle to lower its leverage further as the company is expected to apply a portion of its free cash flow to absolute debt reduction," added Foley.

Earlier this year, Isle completed a refinancing that eliminated its closest debt maturity as well as increased the amount of pre-payable debt in the its capital structure. As a result, even with the approximately $60 million of capital expenditures associated with the construction of a land-based casino in Bettendorf, Iowa, Moody's expects Isle will generate between $100 million and $120 million of free cash flow in fiscal 2016 and 2017 combined. Applying all of these proceeds to debt reduction, and assuming a 5% increase in EBITDA in each of the next two fiscal years would bring debt/EBITDA close to 4.0 times.

Other factors supporting the B1 Corporate Family Rating include Moody's stable US gaming Industry Sector Outlook (ISO) -- Moody's revised the US gaming ISO to stable from negative this past July -- and Isle's geographic diversification which reduces Isle's exposure to regional economic downturns, overbuilding in a particular market, competitive challenges, and regulatory risk. Isle operates gaming facilities in six states. No single state accounted for more than 30% of the company's property-level EBITDA, and no single casino property accounted for more than 20% of its property-level EBITDA.

The stable rating outlook is based on Moody's expectation that Isle will continue to apply its free cash flow towards debt repayment and that the operating environment for regional gaming remains stable. Also considered is the company's good liquidity which is characterized by positive free cash profile, lack of material near-term debt maturities, and Moody's expectation that Isle will continue to maintain a comfortable level of cushion with respect to the leverage and coverage maintenance tests included in its credit agreement.

A higher rating is possible over the longer-term but is currently limited by Moody's more general concerns regarding the fundamental challenges faced by Isle and other US regional gaming operators. The concerns include casino oversupply conditions, continued pressure on consumer discretionary spending, and changes in consumer preferences away from traditional gaming activities. Ratings could be lowered if gaming demand trends show signs of a material weakening from current levels and/or Isle's debt/EBITDA will rise to an remain at over 5.25 times for an extended period of time.

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