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Howard Stutz

Affinity Gaming warns it expects to default on portion of its long-term debt

8 July 2014

LAS VEGAS -- Casino operator Affinity Gaming warned investors it was expecting to default on a portion of its $382.7 million in long term debt, but the company expects to fix the issues with its lenders.

Affinity, which operates 11 casinos in Nevada, Colorado, Missouri and Iowa, said in a filing with the Securities and Exchange Commission last week it expected a default in its “senior secured credit agreement due to non-compliance with certain financial covenants.”

The owner of the off-Strip Silver Sevens Hotel & Casino and the three Primm casinos said it was hoping to resolve the concerns quickly.

“We are working with our advisors and lenders to reach a solution to this matter, which solution may include an amendment, waiver or refinancing,” Affinity said in the SEC filing. “We are, and expect to remain, current on all obligations, including those under both our senior secured credit facility and our senior unsecured notes due 2018.”

As part of the filing, Affinity told investors its revenues for the quarter that ended June 30 would be between $95.6 million and $99.4 million, compared to $100.3 million in the same quarter a year earlier.

The company’s cash flow was expected to be between $12.5 million and $13 million, compared to $17.8 million in the 2013 second quarter.

Affinity said it would have a $900,000 expense associated with a data breach into its system that processes customer credit and debit cards. The company said in May it had no evidence that customer information was stolen.

Affinity is privately held by several investment groups but the company’s debt is public.

The SEC filing caused Moody’s Investor Services to give Affinity a negative rating outlook on the company’s debt. In a statement, Moody’s gaming analyst Keith Foley said the downgrade reflected Affinity’s “steady decline in earnings and corresponding rise in leverage.”

Analysts said Affinity has seen property-level earnings declines in its operating segments.

Foley said he expects Affinity will ultimately succeed in obtaining a waiver or amendment, but there is some uncertainty on whether or not the company can avoid more restrictive and expensive terms, conditions and pricing in its bank credit facility going forward.

“The negative rating outlook also considers the challenge associated with Affinity’s ability to stabilize its earnings decline in light of Moody’s expectation of a general weakening in gaming demand,” Foley said.

Deutsche Bank gaming analyst Andrew Zarnett said he previously warned investors about the possibility of a covenant breach given the company’s downward cash flow trend.

Zarnett thought Affinity’s management would use available cash to repay debt in order to avoid a default. Affinity said in the SEC filing it expected to have cash on the books of between $135 million and $137 million at the end of the quarter.

“We are deeply disappointed by management’s lack of wherewithal to make the prepayment,” Zarnett said.

Private equity firm Z Capital of Illinois is Affinity’s largest shareholder with a 30.5 ownership stake in the company. Connecticut-based hedge fund Silver Point Capital owns 24.9 percent.