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Arnold M. Knightly

Analyst says Hooters Hotel could default

10 February 2009

LAS VEGAS, Nevada -- Hooters Hotel could default on its $130 million bond in the next few months if the current operating environment doesn't improve quickly, according to a bond analyst's Monday note to investors.

The note was issued after the off-Strip property estimated that it would post an operating loss of $1.5 million in the fourth quarter. Hooters made the estimate in a preliminary revenue report released Monday morning to the Securities and Exchange Commission.

Barbara Cappaert, a bond analyst with KDP Investment Advisors, said "given the fourth-quarter operating performance and the expectation that the first quarter will be equally as bad, the company is unlikely to make its April coupon," referring to a $3 million bond payment due April 1.

Michael Hessling, property president and minority owner, declined to comment on Monday.

Cappaert is not the only analyst expressing concern about Hooters' economic vitality.

Moody's Investment Services downgraded the property's debt in December to Ca, or extremely speculative, from Caa3, or in poor standing, because "it appears unlikely that the company will generate sufficient cash flow to avoid a default."

Moody's bond analyst Kendra Smith expressed concern then that the property would not be able to make $11.4 million in debt payments due this year.

Hooters' revenues dropped 11.9 percent to $13.3 million from $15.1 million for the quarter ended Dec. 31, the filing with the Securities and Exchange Commission shows.

Fourth-quarter cash flow, defined as earnings before interest, taxes, depreciation and amortization, was $600,000, down from $1.8 million reported a year earlier.

Hotel revenues dropped 22.7 percent and casino revenues slipped 4.3 percent, but food and beverage revenues remained flat.

Hooters joins Station Casinos, Harrah's Entertainment, Herbst Gaming and Black Gaming as privately held casino companies caught with high debt loads after the economic downturn.