Fitch Ratings-New York-27 October 2016: Distressed gaming, lodging and restaurant companies often find themselves on the road to bankruptcy during periods of weak consumer spending, according to Fitch Ratings' updated Gaming, Lodging and Restaurant Bankruptcy case study report.
"Weak consumer or business spending, rising costs, excess capacity and changing consumer preferences present challenges to the gaming, lodging and restaurant sectors," said Sharon Bonelli, Senior Director, Leveraged Finance.
Thirteen of the 25 bankruptcies in Fitch's case study occurred during the 2008 – 2010 recession, when consumer discretionary spending slid along with the residential real estate market downturn and corporate travel and entertainment budgets were slashed. Those with highly leveraged balance sheets were most vulnerable to cash-flow challenges, eroding liquidity and ultimately bankruptcy.
There have been several recent bankruptcy filings among smaller casual and fast-casual restaurant chains, reflecting declining sales caused by changing consumer preferences, heightened competition and higher minimum wages. They include: Logan's Roadhouse, Garden Fresh (operator of Souplantation and Sweet Tomatoes), Rita Restaurant Corp. (operator of Don Pablo), Buffets and Cosi.
In many cases store closures provided a much-needed reduction in industry capacity as chains shuttered unprofitable locations and rejected burdensome leases, allowing them to emerge from bankruptcy with a smaller footprint and lower cost structure.
In the gaming sector, Caesars Entertainment Operating Company's (CEOC) approaching bankruptcy reorganization will mark the end a long-running saga that started in 2008 with a $31 billion LBO, creating an over-leveraged capital structure. Fitch expects the settlement agreement signed on Oct. 4, which includes substantial contributions from parent, Caesars Entertainment Corp (CEC) to CEOC, will pave the way for emergence as a going concern next year. However, the plan still needs creditor approval votes, court confirmation and is subject to other contingencies.
CEOC plans to split operations into an operating company (Opco) and a property company (PropCo), with the latter structured as a REIT. Fitch estimates that the reorganization plan, if approved, will result in an exit EV/EBITDA multiple of 6.7x for the OpCo and 13.1x for the PropCo. Parent contributions would boost unsecured creditor recoveries to 83% for guaranteed noteholders and 66% for non-guaranteed note claims if the plan proceeds as proposed.
Two Atlantic City gaming operator cases that were resolved in the past couple of years ended in partial or full liquidation with the properties permanently shutting down. These included the second Revel AC bankruptcy and Trump Entertainment Resorts. More intense regional competition, and in the case of Trump, Carl Icahn's inability to strike a deal with Taj Mahal's union workers, led to the closures of the respective resorts. This contrasts with most sector bankruptcies, which end in emergence as going concerns rather than liquidation.
The full report, "Gaming, Lodging and Restaurant Bankruptcy Enterprise Value and Creditor Recoveries: Fitch Case Studies – 11th Edition," is available at www.fitchratings.com.
Contacts: Leveraged Finance Sharon Bonelli Senior Director +1-212-908-0581 33 Whitehall Street New York, NY 10004 Gaming Alex Bumazhny Senior Director +1-212-908-9179 Restaurants Carla Norfleet Taylor Senior Director +1-312-368-3195
