Rating Process Case Study - Cfany

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Rating Process Case StudyDifferentiating Speculative Grade Issuers &Boyd Gaming Case StudyAlex Bumazhny, CFA – Senior DirectorColin Mansfield, CFA - DirectorJune 13, 2018

Contents123Fitch’s Corporate Rating Criteria Overview2Differentiating Speculative Credit Issuers5Boyd Gaming Corp. Case Study81

1Fitch’s Corporate Rating Criteria Overview2

Corporate Rating Criteria Fitch’s Issuer Default Rating (IDR) is an assessment of an issuer’s vulnerability of default on financialobligations. The ratings of individual debt issues incorporate additional information on priority of payment andlikely recovery in the event of default.IDR (Default Risk) Recovery Instrument Rating3

Corporate Rating CriteriaDetermining IDR – Assessing Qualitative and Quantitative FactorsKey Rating Factors Sector risk profiles Country Risk Cash flows and profitability Management strategy/governance Financial structure Group structures Financial flexibility Business profileFinancial profile4

Corporate Rating CriteriaRating Navigators provide guidance of the concepts of Fitch’s criteria to theissuers in the sector the Navigator covers. Emphasis on guidance, asFitch’s ratings are not formulaic.5

Corporate Rating Criteria6

Corporate Rating CriteriaSector Risk Profile Provides a typical rating range for issuers in a given industry. Upper boundary of the range is not a cap. Stable characteristics: few competitors, high barriers to entry, national dominance, andpredictable demand levels. Riskier characteristics: industry in decline, highly competitive, capital intensive, cyclical andvolatile.Country Risk Tied to the country where the issuer operates with two impacts Operating Environment Transfer and Convertibility Risk7

Corporate Rating CriteriaManagement Strategy Ability to create a healthy business mix, maintain operating efficiency, and strengthen themarket position. Financial performance over time and future strategy and past record relative to goals. Risk tolerance, in particular relative to M&A and expansion financing.Corporate Governance Asymmetric rating consideration. Good governance is credit neutral while weakergovernance is a negative. Main characteristics Fitch focuses on: Governance/Group Structure: checks against conflicts of interest (e.g. managementcompensation, board make up, key-man risk, etc.). Financial Transparency: high quality and timely financial reporting.8

Corporate Rating CriteriaGroup Structure – parent-sub linkage, JV/minority ownership adjustmentsParent Subsidiary Linkage Stronger Parent / WeakerSubsidiary Weak Linkage - Emphasis on deconsolidated financial profiles No guarantee, sub has littlestrategic value, little operating tiesParentIDR - ASub AIDR - BBB Stronger Parent / WeakerSubsidiary Strong Linkage - Emphasis onconsolidated financial profile Guarantee, sub has significantstrategic value and/or operatingtiesParentIDR - BBBSub BParentIDR – BBB Sub AIDR – BBB Weaker Parent / StrongerSubsidiary Weak Linkage – Emphasis on deconsolidated financial profiles Sub has strong ring fencingSub BSub AIDR - ASub BParentIDR – BBB Sub AIDR – BBB Weaker Parent / StrongerSubsidiary Strong Linkage – Emphasis onconsolidated financial profile Sub has weak ring fencingSub B9

Corporate Rating CriteriaBusiness Profile Ability to withstand competitive pressures Position in key markets Level of product dominance Ability to influence price Maintaining a high level of operating performance Diversification by product, geography and customers/suppliers Comparative cost position Size – if confers major advantages in terms of operating efficiency,economies of scale, financial flexibility, and competitive position. Business Profile factors and sub-factors will be customized per sectorfor the purpose of the Sector Navigators.10

Corporate Rating CriteriaFinancial Profile Quantitative aspect of analysis focuses on an issuer’s financial profileand it ability to service its obligations from a combination of internal andexternal resources. Emphasis on cash-flow measures of earnings, coverage and leverage(e.g. FFO, EBITDA, etc). As a rule of thumb sectors with more stable cash flows can handle moredebt at the same rating level. ‘Forward-Looking Through-the-Cycle Approach’ – Fitch analysts useCOMFORT model to standardize at least three years of historicalfinancial metrics and 3-5 years of forecasted metrics. Meant to illustrate a typical economic cycle Also create a stress scenario, meant to show a downgrade scenario11

Corporate Rating CriteriaFinancial Profile (cont’d) Cash Flows and Profitability Affect the maintenance of operating facilities, internal growth andexpansion, access to capital, and the ability to withstand downturns. Focus on sustainability and stability – supports ability to service debtand finance operations and capital requirements. Financial Structure Level of dependence on external financing. Industries differ in their need for capital and their capacity for debt.12

Corporate Rating CriteriaFinancial Profile (cont’d) Financial Flexibility Issuer financial discipline and policy Ability to control capital spending Broad access to capital and diversification of funding sources Strong liquidity – cash on hand, FCF, committed lines of credit Debt mix: unsecured vs. secured & fixed vs. variable Amortization/maturity schedule13

2Differentiating Speculative Credit Issuers14

Differentiating Speculative Credit IssuersRating DefinitionsB: Highly speculative‘B’ ratings indicate that material default risk is present, but a limitedmargin of safety remains. Financial commitments are currently beingmet; however, capacity for continued payment is vulnerable todeterioration in the business and economic environment.CCC: Substantial credit riskDefault is a real possibility.CC: Very high levels ofcredit riskDefault of some kind appears probable.C: Exceptionally high levelsof credit riskA default or default-like process has begun, or the issuer is instandstill, or for a closed funding vehicle, payment capacity isirrevocably impaired.15

Differentiating Speculative Credit IssuersRelative Importance of Factors in Determining RatingsHigherModerateB vs BLowerB vs B-B- vs CCC CCC vs CCC-Business ModelStrategyCash flowLeverage profileGovernance andfinancial policyRefinancing riskLiquidity16

Differentiating Speculative Credit IssuersKey Rating Considerations for Highly Speculative CreditsFactorB BB-CCC tionriskLimitedModerateMeaningfulChallengingyet achievableUncertainHighlyspeculativeNot credibleCash flowprofileConsistentlypositiveNeutral Acceleratingcash everagingpathDeleveragingHigh oportionate andincreasingGovernance/ financialpolicyCommittedSomecommitment ileInevitablebalance HighOff leSatisfactoryLimitedMinimalheadroomPoor / PartlyFundedUnfundedDe factoinsolventLiquidityUnrecoverable17

3Boyd Gaming Corp. Case Study18

Summary of Rating Drivers Exposure to cyclical industry Tepid sector outlook for regional gaming High adjusted leverage, but declining Strong free cash flow supports capital intensity / shareholder returns. Increasing diversification19

Qualitative AssessmentCompetitive EnvironmentWEAKERNo ba rri ers toentryLow l i kel i hoodof new entra tsMa rketovers a tura ti on,decl i ni ngMi n. s uppl ygrowth,underpentra tedAggres s i vepromoti ona la cti vi tyProductqua l i ty/l oya l tydema nd dri versMarket PositionSma l l pl a yerMa rket l ea der,competi ti vel yprotectedNega ti ve bra ndIDEffecti ve bra nds& l oya l typrogra mLow qua l i tyreduci ngrevenuesHi gh qua l i ty,cons i s tentrei nves tmentDiversificationGeogra phi ca l l yconcentra tedSevera l ma rkets ,potenti a l l yi nterna ti ona lPri ma ri l y ga mi ngori entedStrong nonga mi ngdi vers i fi ca ti onSTRONGER20

Differentiation at Lower End of Rating Spectrum21

Corporates Rating Navigator for Boyd22

Peer AnalysisPenn d-Aloneb*/stable9/30/201725Multiple regional, 1Las Vegas Strip asset,1 other Las Vegasasset185%b*/stable9/30/201716Multiple regionalRevenueGrowthEBITDAREBITDAR MarginRent ExpenseEBITDAEBITDA tal DebtAdjusted Debt1,3514,9628344,073Total LeverageAdjusted Leverage3.2x5.7xCFFOCapexDividendsFCFFCF MarginCapital IntensityIDR/IDCOStatement DateAssetsMarkets# of Leases% EBITDAR subjectto leasePenn NationalPro Forma forPENN/PNK mergerCaesarsBoyd GamingEntertainmentPro forma for recent Consolidated and ProacquisitionsForma for acquisitionsb */stablePro Forma33Multiple regional,multiple Las VegasStripMultiple regional,multiple Las VegasStrip, 2 5.6%-4.8%6.2%-7.8%-0.7%-17.3%2100%--B /StablePro Forma 2017Pro Forma4129Multiple regional, 1Multiple regional,Las Vegas Strip asset, multipel Las Vegas1 other Las VegasLocals, multipleassetDowntown Las Vegas31 100%23%MGM ResortsInternationalConsolidatedQualitative andQuantitativeComparisonBB/Stable12/31/2017 Portfolio size,diversification, andqualityLeverage metricsand trajectory,adjusted for MasterLease rentalpaymentsEBITDA and freecash flow margins23

Rating SensitivitiesCompanies of similar sizeand market exposureshould have similarleverage sensitivities atthe same rating level.This can be adjustedslightly for individualcharacteristics.Examples MGM can withstandhigher leverage at ‘BB-’level given internationalexposure and favorabledomestic mix. Caesars and PENN canwithstand higher leverageat ‘B ’ level relative toBoyd given diversification,stronger FCF, andsizeable loyalty programs.24

Recovery AnalysisSegmentLas Vegas LocalsDowntownMidwest & SouthPinnacle AssetsValley A 6326.0192(58)6.6(377)5536.63,622Segment-level analysis to derivegoing concern enterprise value EBITDAR stresses to reflect moderaterecessionary environment of high singledigit to low double-digit revenuedeclines, assuming 50% flowthough.Range of segment EV multiples reflectdiffering asset quality, competitiveenvironment, and operating coststructure.Recovery Analysis( Mil., Except Where Noted; Issuer DefaultRating: B )Distressed EV As a GCGoing Concern EBITDAEBITDA Multiple (x)Additional Value from Affiliates, MinorityInterest, OtherGoing Concern Enterprise ValueLess: Administrative Claims (10% of EV)EV Available for ClaimsPrioritySr. Secured (First Lien)Sr. essionAllocation00CommentsAnnualized acquisition results with 20%-25% stressdepending on marketWeighted average of market multiples (6x–7x).Recovery waterfall guides issuespecific notching from IDR———— tingRR1RR4Notching30 Assumes 10% administrative claims(standard).Assumes full draw on revolver ( 775million for Boyd).RatingBB B aIncludes 850 million in incremental unsecured debt for acquisitions, which is Fitch’s assumption. EV ‒ Enterprise value.GC ‒ Going concern.Source: Fitch Ratings.25

Fitch Ratings’ credit ratings rely on factual information received from issuers and other sources.Fitch Ratings cannot ensure that all such information will be accurate and complete. Further, ratings are inherently forwardlooking, embody assumptions and predictions that by their nature cannot be verified as facts, and can be affected by futureevents or conditions that were not anticipated at the time a rating was issued or affirmed.The information in this presentation is provided “as is” without any representation or warranty. A Fitch Ratings credit rating isan opinion as to the creditworthiness of a security and does not address the risk of loss due to risks other than credit risk,unless such risk is specifically mentioned. A Fitch Ratings report is not a substitute for information provided to investors by theissuer and its agents in connection with a sale of securities.Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch Ratings. The agency does notprovide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security.ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESELIMITATIONS AND DISCLAIMERS AND THE TERMS OF USE OF SUCH RATINGS AT WWW.FITCHRATINGS.COM.26

fitchratings.com@fitchratingsNew YorkLondon33 Whitehall StreetNew York, NY 1000430 North ColonnadeCanary WharfLondon, E14 5GN

Penn National Gaming Pinnacle Entertainment Penn National Boyd Gaming . MGM Resorts International Stand-Alone Stand-Alone Pro Forma for PENN/PNK merger Pro forma for recent acquisitions Consolidated and Pro Forma for acquisitions Consolidated IDR/IDCO b*/stable b*/stable --- B /Stable b */stable BB/Stable Statement Date 9/30/2017 9/30/2017 .

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