UPDATE: S&P Places Gaming and Leisure Properties (GLPI) on CreditWatch Negative

(Updated - March 10, 2015 3:35 PM EDT)

Standard & Poor's Ratings Services today said it placed its ratings, including its 'BB+' corporate credit rating, on Gaming & Leisure Properties Inc. (Nasdaq: GLPI) on CreditWatch with negative implications.

"The CreditWatch listing reflects our opinion that GLPI's proposal to acquire the real estate assets of Pinnacle Entertainment Inc. for about $4.1 billion, including the initial assumption of about $2.6 billion of debt, could signal a sustained increase in adjusted debt to EBITDA above the company's stated financial policy goal of 5.5x, which is also our threshold for the 'BB+' rating on GLPI," said Standard & Poor's credit analyst Carissa Schreck.

It is our understanding that in the event the transaction is completed under currently proposed terms, GLPI intends to issue equity at a future date to reduce the amount of initial debt assumed by several hundred million dollars and to complete financing for the proposed acquisition in a manner that would limit the increase in initial leverage to around 6x in 2015 upon the close of the proposed transaction.

However, we believe the terms of the current acquisition proposal are fluid and the final negotiated consideration could increase from the proposed level or result in a higher level of debt assumed by GLPI. In addition, the final amount, nature, and timing of a future equity raise are unclear at this time. Also, GLPI's adjusted debt to EBITDA at the end of 2014 was in the low-6x area, which is weak compared to our 5.5x threshold for the company at its current 'BB+' rating. This measure is currently weak primarily because of borrowing in 2014 to fund an acquisition, development spending, and additional distributions to shareholders related to the company's REIT spin-off. We could lower the rating one notch to 'BB' if GLPI incurs more debt than it currently assumes in the proposed terms of the transaction, or issues debt at a rate that is above GLPI's current cost of capital in a manner that sustains leverage above 5.5x or EBITDA coverage of interest below 3x.

In resolving the CreditWatch listing, we will review the final terms of the proposed transaction, including the company's prospective debt structure, potential equity raise, and planned master lease agreement for Pinnacle's assets. We will also assess GLPI's ability to achieve its publicly stated financial policy goal of maintaining adjusted debt to EBITDA of 5.5x, which is our leverage threshold at the 'BB+' rating on GLPI. We aim to update the CreditWatch listing as soon as possible once we have sufficient information around the final terms and timing of the proposed transaction and potential
future financing arrangements.

We could lower the rating one notch to 'BB' if we expect GLPI to sustain leverage above 5.5x or EBITDA coverage of interest expense below 3x. This could result from an increase in the acquisition purchase price and assumed debt to complete the transaction, if we believe GLPI would experience delay in raising equity to partly fund the acquisition, or if we believe the equity raise would be insufficient to enable sustaining adjusted debt to EBITDA at 5.5x. Additionally, downside rating pressure could come from GLPI's tenants experiencing a meaningful deterioration in their credit quality or if we believe GLPI will embark on other significant development opportunities or acquisitions, resulting in leverage sustained above 5.5x or EBITDA coverage of interest expense below 3x.

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