Isle of Capri swung to Q1 profit, touts recent bond deal's impact, cuts leverage

By Paul Deckelman

New York, Aug. 29 - Isle of Capri Casinos, Inc. got back in the black during its most recently completed quarter despite still-tepid consumer discretionary spending.

The company used a junk bond deal just after the quarter ended to push out its debt maturities - and not just those of the near-term bonds that were actually taken out using the new-deal proceeds.

The St. Louis-based operator of 15 casinos in Missouri, Mississippi, Iowa, Louisiana, Colorado and Florida said Wednesday that its leverage ratio for financial covenant purposes had decreased slightly during the 2013 fiscal first quarter ended July 29 to 5.6 times debt versus adjusted EBITDA. That ratio had stood at 5.7 times at the end of the fiscal 2012 fourth quarter on April 29 and was 6.2 times a year earlier.

The company's chief financial officer, Dale R. Black, said in a statement when the results were released that as a result of the company's refinancing of its then-outstanding $357.28 million of 7% senior subordinated notes that were to have come due in 2014, its nearest maturity is now in 2016.

"Coupled with our steady deleveraging, our capital structure is stronger than at any time in the last several years," Black declared.

Maturities pushed out

On a conference call with analysts following the release of the results, Black said that at the end of the quarter, the company had total debt of $1.1 billion, about flat with the previous quarter. That capital structure included $493 million of term loan debt, $300 million of 7¾% senior notes due 2019 and the $357.28 million of the 7% subordinated notes plus other debt of $4 million.

Just after the end of the quarter, Isle sold $350 million of new 8 7/8% senior subordinated notes due 2020, pricing them at par in a quick-to-market deal, with the proceeds slated for the redemption of the existing 7% notes.

Armed with those proceeds, the company bought back almost all of the latter notes via a tender offer that ended on Aug. 21, with holders tendering $338.23 million of the bonds by the close, or 94.6% of the outstanding amount. Total consideration was $1,003 per $1,000 principal amount of notes tendered by the Aug. 6 consent deadline, including a $20 per $1,000 consent fee, as well as accrued interest. Virtually all of the tendering holders submitted their notes by that early deadline and got that full consideration.

The company then called the remaining $19.06 million of the notes, which will be redeemed at par plus accrued interest on Sept. 7.

By taking out the 7% notes when it did, the company not only pushed that particular maturity out by more than six years - replacing bonds maturing on March 1, 2014 with an issue due on June 15, 2020 - but it also satisfied the terms of a key provision of the $800 million credit facility agreement that it entered into in March 2011. Under that provision, the credit facility - consisting of a $500 million term loan and a $300 million revolving credit line - was scheduled to mature on Nov. 1, 2013 if the 7% notes had not been refinanced by that date. Once the refinancing transaction has been fully completed with the redemption of the remaining 7% notes, the revolver's maturity will be pushed out to March 25, 2016 and the term loan will mature a year later on March 25, 2017.

Black said that at the end of the first quarter, the company had $277 million of revolver borrowing capacity.

It also had $89.4 million of cash, which does not include another $12.9 million of restricted cash.

As a result of the refinancing, Isle will incur charges of about $3 million in the fiscal second quarter on the underwriting discounts and the various fees related to the financing.

Interest expense during the just-completed quarter came to $20.43 million. Black said that interest expense for the balance of the year is now expected to be about $66 million, with capitalized interest for the quarter of around $800,000. The revised interest expectations reflect the increase in interest rates as a result of the new bonds. At the end of fiscal 2012, the company had projected between $83 million and $85 million of interest costs for the upcoming year, net of capitalized interest.

No acquisition plans - yet

During the question-and-answer portion of the call following the formal presentations by Black and the company's president and chief executive officer, Virginia M. McDowell, an analyst wanted to know if Isle - having brought its leverage ratio down and with almost $300 million of borrowing capacity - might be thinking about doing any acquisitions. In the past, Isle has grown via such deals, acquiring Lady Luck Gaming Corp. and its chain of casinos in Mississippi, Iowa and Las Vegas in 2000 and subsequently buying other individual properties like the former Casino Aztar and the Rainbow Casino, both in Mississippi, from other operators.

Black said that "currently, there's not much out there that we have seen." But he added that "we do see everything that comes on the market," including several other deals earlier this year within the regional gaming space, which it decided to take a pass on after it had "done our homework" on those potential transactions.

"We're looking at capital allocation now the same way we always have," the CFO said, "other than that we are starting to generate a few more options for ourselves. We have money that we are spending back into our existing properties," as well as on new casinos it is developing in Cape Girardeau in southern Missouri and at the Nemacolin Woodlands resort in western Pennsylvania.

"Our mantra right now is to continue to allocate that capital there, pay down debt until the right opportunity comes along, and when we find the ones that make sense, we clearly want to be involved in the game," Black said.

Deja vu all over again?

In her remarks, McDowell took note of Hurricane Isaac, which was battering New Orleans and other areas of the Gulf Coast "almost seven years to the day" after the much more powerful Hurricane Katrina slammed into that area at the end of August 2005. Katrina caused massive casualties and widespread damage, including to Isle's then-existing barge-based casino facility in the coastal city of Biloxi, Miss., as well as a new casino barge it was building there.

So powerful and damaging was Katrina that the existing floating casino facility - along with several other similar gaming barges nearby run by rival companies - was picked up and then slammed down, heavily damaged, on the other, inland side of the busy U.S. Route 90 roadway that runs along the coast, and the new Isle barge was almost completely totaled. The company was forced into extensive rebuilding, eventually opening a new land-based casino in Biloxi after state gaming regulations there were changed to allow such facilities. Previously Mississippi had only allowed gaming on traveling riverboats or on docked barges.

McDowell said that "we've been in constant contact with our colleagues who have remained at our property in Biloxi," which the company is actually in the process of selling. But she noted that Isaac, while largely following Katrina's track, is "thankfully, a much weaker storm."

For the quarter, net revenues rose to $235.8 million from $227.6 million a year ago, and net income got back in the black at $6.7 million (17 cents per share), versus the year-ago red ink of $2.3 million (6 cents per share). The year-ago comparables were impacted by the closure of five properties for several weeks in the 2011 first quarter due to yet another natural disaster, the extensive flooding that took place in vast areas along the Mississippi River.

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