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Howard Stutz

Moody's lowers Herbst Gaming's bond rating

24 April 2008

LAS VEGAS, Nevada -- Moody's Investment Service on Wednesday lowered its bond ratings for Herbst Gaming, less than a month after the casino operator told investors it might have to seek bankruptcy protection.

The rating service said Herbst has not yet negotiated a forbearance agreement with its lenders. In a filing with the Securities and Exchange Commission on March 31, Herbst said it had received a going concern opinion from its auditors that triggered a potential default under the company's credit agreement. The bonds were cut to Caa2 from B3.

In a statement issued through Thomson Financial, Moody's said the downgrade took into consideration that Herbst may not meet its financial convenants in 2008. In its SEC filing, Las Vegas-based Herbst said its Southern Nevada operations have been negatively affected by failing economic conditions, a statewide ban on smoking in taverns and restaurants, and competition from American Indian casinos in Southern California.

"It remains unclear at this time what course of action the lenders may pursue with respect to the event of default," Moody's said. "The downgrade acknowledges that the continued volatility in the capital markets along with the high cost of borrowing makes it less likely that a strategic alternative will emerge that does not involve some level of impairment."

Herbst Gaming operates 16 casinos in Southern and Northern Nevada, including the three Primm resorts along Interstate 15 at the California-Nevada border, 35 miles south of Las Vegas, and the off-Strip Terrible's on East Flamingo Road. The company also owns three casinos in Missouri and Iowa and operates approximately 7,200 slot machines through its Nevada route operation.

Herbst Gaming said it would be forced to file for bankruptcy protection unless the company can reorganize a payment structure for its more than $1.146 billion debt.

The company is privately held by brothers Ed, Tim and Troy Herbst, but roughly $371 million of its debt is through publicly traded bonds.

In the SEC filing, Herbst Gaming said the poor financial results the company experienced during the second half of 2007 have carried over into the first few months of 2008.

Herbst's overall revenues were $849.2 million in 2007, almost 43 percent higher than 2006, because the company spent $543 million to acquire two major casino companies, almost doubling the size of its casino holdings.

However, a 20 percent loss in revenues from its slot-route business, coupled with a doubling of the company's costs, expenses and interest payments, sent Herbst Gaming to a net loss of $127.2 million last year.

In February, Herbst hired Wall Street investment house Goldman Sachs to evaluate strategic alternatives for the company, which could include anything from a debt recapitalization to a sale of some of its businesses.