Fitch Ratings recent B+ rating on Great Canadian Gaming Corp.’s long-term debt reflected optimism in the company, which is owned by Apollo Management.
Senior secured debt got a B+, unsecured debt a B-. According to Fitch, the ratings reflect healthy generation of discretionary free cash flow and a recovering Canadian casino economy. There was mild trepidation, however, regarding long-term leverage, “given the lack of constraints (e.g., financial policy, maintenance covenants) and the potential for future recapitalizations.”
The bond-ratings service estimated Great Canadian’s leverage at 5.3 times EBITDA and didn’t assume that the free cash flow would go toward paying that downward, “given the lack of financial policy and incentive to do so.” Added Fitch analysts, “There is risk that leverage could increase in the medium term from debt-funded shareholder returns at both the restricted group and [joint venture] level.”
Fitch’s working assumption is that Great Canadian operates between five times and six times EBITDA in debt and considered it likely that further debt could be raised. “The restricted group achieved its cash flow-based ‘trigger condition’ in July 2022 given the strong EBITDA growth, which allows for an increased level of permitted restricted payments. … In addition, the JV already increased its credit facility by CAD500 million in late 2021 to fund a distribution to Apollo and Brookfield [Asset Management].”
While allowing that Canada’s casino industry recovered from COVID at a slower pace than that of the United States, Fitch reported that Canadian “demand has returned to more normalized levels after the lifting of restrictions in spring 2022 and ongoing rollout of non-gaming amenities.” The relative slowness of the rebound was pegged to more stringent health requirements in the Great White North.
The ratings service also liked Great Canadian’s competitive position, long-term operating agreements (some stretching until 2038), and exclusivity in certain markets, including the greater Toronto area. Great Canadian also has a 50 percent share of the Vancouver marketplace, as well as controlling three of the four casinos in Nova Scotia and New Brunswick.
“Exclusivity comes at a high cost, with provincial crowns retaining roughly 60% of gross gaming revenue,” Fitch allowed. On the plus side, provincial governments were said to be supportive of capex improvements and expansions, such as those at Great Canadian’s British Columbia casinos, which represent 25 percent of its slot inventory. “These high barriers to entry and minimal new competitive supply are viewed positively and set GCGC’s operating environment apart from its U.S. regional peers.”
Unlike the U.S. economy, Canada’s is not recessionary according to Fitch, with “less intense macroeconomic headwinds.” These, combined with even a modest recovery in casino revenues, should allow Great Canadian to outperform next year, wrote the analysts.
Canadian gaming revenue in 2023 is projected to be on a flat trajectory compared to the modest decline foreseen for U.S. gambling houses. Great Canadian’s marketing profile also limits its exposure to international play, with its strengths being local and drive-in customers.