Moody's downgrades Gateway Casinos

Moody's Investors Service said it lowered Gateway Casinos and Entertainment, Inc.'s corporate family and probability-of-default ratings to Caa2 from B3, its C$575 million first-lien term loan due 2014, C$115 million first-lien delayed-draw term loan due 2014 and C$15 million first-lien revolver expiring 2013 to B3 (LGD 2, 29%) from B1 (LGD 3, 31%) and its C$400 million second-lien term loan due 2015 to Caa3 (LGD5, 83%) from Caa2 (LGD5, 85%).

The outlook is negative.

The agency said the downgrade is based on a continuation of significant leverage, earnings challenges related to weak gaming demand trends, slower-than-expected ramp-up of its Grand Villa Burnaby expansion, heightened competition among existing casino operators and Moody's view that without a significant improvement in operating results or a meaningful equity contribution, Gateway's capital structure is not sustainable in its current form.

The negative outlook considers that despite Gateway's cost-cutting initiatives and the assumption of certain operating expenses by its parent company, the difficult economic environment along with continued intense competition and existing smoking ban in British Columbia will make it difficult for the company to reduce leverage in the foreseeable future, Moody's said.

The debt-to-EBITDA ratio continues to hover above 10 times.

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