B.C. casino dangles higher bond payout
Great Canadian Gaming Corp. is asking debt holders to gamble that boosting leverage to reward shareholders will keep the company in the black.
To sweeten the offer, the owner of betting parlours and the River Rock Casino Resort near Vancouver is giving investors the chance to receive higher interestrate coupons over time. The risk is that the odds of a credit-rating upgrade diminish and even a threat of default is likely to rise if more cash flow is directed to shareholders.
Great Canadian asked debt holders for permission to rewrite restrictions on $450 million of bonds it sold in July 2012 that limit shareholder distributions, according to a consent solicitation document filed Monday.
Approval would allow the already below-investment grade rated casino operator to increase leverage to reward shareholders with either stock buybacks or dividends.
“They want to throw off the shackles so they can better manage their own return on capital and their capital allocations than they are currently allowed to do,” Kenric Tyghe, a Toronto-based equity analyst at Raymond James Securities, said Tuesday. “They want to be in a position to buy back shares more aggressively” and start paying dividends.
Great Canadian’s free cash flow soared to $148.3 million last year, from $79.1 million in 2011, the last full year before the company sold its bonds in July 2012, according to data compiled by Bloomberg.
As of the end of last year, Great Canadian’s total debt was 3.3 times its earnings before interest and taxes, the lowest level for the measure since 2004, the data show.
The proposal follows an outcry over companies from the architect of the Keystone XL pipeline Enbridge Inc. to coffee chain Tim Hortons Inc. forsaking bondholders to fund growth and dividends.
The Great Canadian request, which needs the consent of holders of a majority of outstanding notes by May 8, promises a consent fee equal to 0.5 per cent of the amount held.
It also dangles the possibility of a bigger coupon as risks rise.
The coupon step-ups use a leverage grid, rare for Canadian high-yield bonds while common in U.S. leveraged loans. The coupon grows in 12-basispoint increments, to as much as 7.375 per cent, as leverage doubles, according to the filing.
The securities were priced three years ago with a 6.625 per cent coupon, and were rated B1 by Moody’s Investors Service, four steps below investment grade, and three levels higher at BB+ by Standard & Poor’s.