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S&P Upgrades Isle of Capri Casinos (ISLE) to 'B+'; YTD EBITDA Growth Exceeding Expectations

September 4, 2015 2:38 PM EDT

Standard & Poor's Ratings Services said it raised its corporate credit rating on St. Louis-based Isle of Capri Casinos Inc. (Nasdaq: ISLE) to 'B+' from 'B'. The rating outlook is stable.

At the same time, we raised all issue-level ratings one notch in conjunction with the upgrade of the company.

"The upgrade reflects EBITDA growth so far in calendar 2015 that exceeds our previous expectations due to revenue growth across most of Isle's portfolio, efficient marketing spending compared to prior years, and other good cost improvements," said Standard & Poor's credit analyst Melissa Long.

We expect that a relatively stable consumer spending and competitive operating environment will allow Isle to modestly grow revenue and maintain the cost structure improvements it has implemented. As a result, we have raised our EBITDA forecast and expect Isle will be able to improve adjusted debt to EBITDA to around 5x by the end of fiscal 2016 (Isle's fiscal year ends the last Sunday in April), in spite of slightly higher capital spending needs for the development of a land-based facility in Bettendorf. We had previously expected Isle to end fiscal 2016 with adjusted debt to EBITDA in the low- to mid-5x area. Furthermore, we expect Isle will generate meaningful discretionary cash flow in fiscal 2017 that will support further deleveraging to the mid- to high-4x area, a forecasted range that is good compared to our mid-5x threshold and in line with an improved financial risk assessment to "aggressive". We believe the anticipated improvement in leverage provides Isle with sufficient cushion compared to our mid-5x threshold to withstand operating volatility that could arise from adverse events like flooding that can have a meaningful impact on Isle's portfolio of properties.

The stable rating outlook reflects our expectation that Isle's EBITDA will grow modestly and our measure of adjusted debt to EBITDA will improve to around 5x by the end of fiscal 2016 and to the mid- to high-4x area in fiscal 2017, a forecasted range that is good compared to our mid-5x threshold at which we would lower ratings.

We could raise the rating one notch to 'BB-' if we believe Isle could sustain adjusted debt to EBITDA below the mid-4x area, incorporating adverse weather events like flooding or regional economic weakness.

While less likely, we could lower the rating if Isle meaningfully underperforms our operating forecast and we expect adjusted debt to EBITDA to increase to and remain above the mid-5x area. This would likely result from greater-than-expected competitive pressures or weather-related events, or an increased level of capital expenditures or a shift in the company's financial policy that resulted in lower discretionary cash flow generation.



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