Isle of Capri repaid over $30 million debt in fiscal Q2, aims for low-4s leverage ratio

By Paul Deckelman

New York, Dec. 2 – Isle of Capri Casinos, Inc. paid down more than $30 million of debt during its most recent fiscal quarter, and its debt balance has declined by some $76 million over the past year.

That, plus an increase in adjusted EBITDA, has allowed the St. Louis-based operator of regional hotel and casino resorts in smaller gaming markets such as Waterloo, Iowa, Black Hawk, Colo. and Lake Charles, La. – well away from over-saturated larger gambling markets like Las Vegas and Reno, Nev., Atlantic City and Tunica, Miss. – to cut its leverage ratio of gross debt as a multiple of trailing 12-month EBITDA by more than a full turn, to 4.5 times from 5.65 times a year ago.

“Over the past two years, we have focused on three primary drivers to increase free cash flow,” Isle’s president and chief financial officer, Virginia McDowell, told analysts on the company’s conference call following its release of results for the fiscal 2016 second quarter ended Oct. 25.

One of these has been paying down debt, along with refining the company’s marketing strategy and reinvesting in its facilities in order to increase customer engagement and satisfaction.

McDowell declared that “our second-quarter results illustrate [that] we continue to make steady progress against these multiple goals as we build a much stronger company focused on creating value for shareholders.”

Speaking of the company’s debt levels and balance sheet position, the CEO continued “trust me when I tell you we have had to search deep in our archives to find the last time Isle had a balance sheet this strong.”

In the news release the company put out to announce its results, McDowell said “our balance sheet is now in the best shape it has been in over a decade.”

Over $30 million debt drop

Isle’s chief financial officer, Eric L. Hausler, said that at the end of the quarter, long-term debt stood at $959 million. That was down from around $989 million at the end of the 2016 fiscal first quarter on July 26, and from $993 million at the end of fiscal 2015 on April 26.

A year-over-year gain of about $29 million, or 16%, in adjusted EBITDA, combined with the $76 million year-over-year debt balance reduction, about a 6% decline, combined to bring the gross leverage ratio down to 4.5 times.

During the quarter, Isle closed on its previously announced $11.5 million sale of its hotel and certain non-gaming assets in Natchez, Miss., to Casino Holding Investment Partners, LLC, the parent company of the Magnolia Bluffs Casino in Natchez. The company realized a $6.4 million gain on the sale for its second-quarter results, and Hausler said proceeds were used to reduce revolving credit facility borrowings.

Hausler said that at the quarter’s end, Isle had $190 million of borrowing availability under its $300 million revolver, with an outstanding balance of $103 million plus some letters of credit outstanding.

Besides the revolver, the company’s capital structure included about $503 million of 5 7/8% senior notes due 2021 and $350 million of 8 7/8% senior subordinated notes due 2020. Earlier this year, Isle did a $150 million add-on to the original $350 million of the 5 7/8% notes, pricing them at 102 on April 7 to yield 5.302%.

Proceeds from the add-on offering, plus revolver borrowings and cash on hand, were used to take out its then-outstanding $300 million of 7¾% notes due 2019. It tendered for the bonds in April, with holders tendering nearly $238 million of the issue and the remaining $62 million called and redeemed in mid-May.

Cash and equivalents at the quarter’s end came to about $60 million.

More debt cuts –to a point

During the question and answer portion of the call following the formal presentations by McDowell and Hausler, an analyst asked how the company planned to allocate its cash flow.

The CFO replied that “this year, we are about 50-50 in terms of debt paydown to capital expenditures.”

He noted the company’s current leverage ratio in the mid-4s, and pointed out that “I think we’ve said we would like to be in the low-4s – so continuing to reduce the debt and improve the leverage profile of the company is still a strategic priority. I think the business works very nicely with 3-plus times interest coverage and low-4s leverage, that’s a really good business.”

He added that “we’re very sensitive to being able to have some additional free cash flow available to us to deploy opportunistically, whether it is somewhere in the cap structure or across the properties.”

But having said that Hausler admitted that even if the company were to pay down 30% of its $100 million-plus of revolver debt, “candidly, we’re not big enough for the ratings agencies to take our ratings significantly higher.”

In September, Moody’s Investors Service lifted the company’s corporate family rating to B1 from B2 previously, with a stable outlook, also lifting the 5 7/8% notes to B1 and the 8 7/8% notes to B3. Also in September, Standard & Poor’s raised its corporate credit rating to B+ from single-B previously and upped all of its issue-level ratings by one notch – the 5 7/8s to BB- and the 8 7/8s to B-.

Despite those improved ratings, the CFO said that “if you drop [the leverage ratio] well into the 3s, I don’t think the ratings agencies are going to recognize that. So from a cost-of-capital standpoint, what we’re trying to do is get our leverage to a point where our cost of capital is as low as we think we can get it and is as optimized as possible.

“We’re not quite there yet. But once we get there, I don’t think it makes sense to just continue to pay down debt.”

He said at that point there are “other opportunities available to the company.”

© 2015 Prospect News.
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