Credit snag at River Rock casino

CHANGES AT RIVER ROCK

The Dry Creek Pomo tribe in Alexander Valley announced plans in January to seek up to $600 million from investors to build a resort beside River Rock Casino and pay off existing debt.

What exists: The 62,000-square-foot facility, which attracts between 2,000 and 3,000 guests a day, has 1,600 slot and video poker machines, 22 table games and a restaurant.

What's planned: The Tuscan-themed project includes a permanent casino

and 255-room hotel with a spa, meeting rooms, restaurants, shops, gardens and terrace plaza.

Shrinking U.S. credit markets and slipping casino revenues are putting a crimp in River Rock Casino's plans to build a $300 million Tuscan-themed resort in Alexander Valley.

River Rock, owned by the Dry Creek Pomo tribe, has shelved plans to raise $600 million for the expansion, saying it's "not practicable" to finance the entire project now.

River Rock hopes to raise money in smaller amounts and build the project in stages. Earlier this month, casino officials told investors they will seek $126 million for the first phase of the resort near Geyserville.

But even that plan is coming under scrutiny on Wall Street. Two influential credit rating agencies recently raised questions about the riskiness of the project, citing the massive debt already incurred to build River Rock's temporary casino amid a decline in gaming revenue.

The casino's credit problems could make it harder to raise money and force it to pay higher interest rates to attract investors.

Tribal and River Rock officials did not return calls last week seeking comment. In January, the tribe expressed confidence the project would be built.

The tribe's gaming authority already owes investors $200 million for its temporary River Rock Casino, parking structures and other improvements on the 75-acre reservation.

River Rock's revenues and profits are down from 2007, and the slump could continue well into next year, according to the rating agencies.

On Sept. 16, Moody's Investors Service lowered the casino's rating outlook from "stable" to "negative," saying analysts expect "some deterioration of River Rock's financial profile in the near term."

A second rating service, Standard & Poor's, placed River Rock on its credit watch

"with negative implications" on Sept. 10, saying it may downgrade the casino operator's debt.

"We expect that weak operating conditions in the gaming industry will continue into the first half of 2009 as economic weakness leads to lower consumer discretionary spending," according to Standard & Poor's report.

River Rock's leverage -- or reliance on borrowed money -- will rise with its proposed financing, increasing the risk of default, Moody's said.

U.S. casino operators' shares dropped in recent weeks after investors questioned whether credit and liquidity problems could hamper their growth plans.

Funding limits for gaming companies could lead to a significant increase in their near-term costs, Oppenheimer & Co. gaming analyst David Katz wrote in a note to clients.

Earlier this month, Standard & Poor's cut its corporate credit and issue-level ratings for Las Vegas Sands Corp. due to liquidity worries. MGM Mirage also may have trouble raising bank financing for a planned expansion, Katz said.

In January, the Dry Creek tribe announced plans to seek up to $600 million from investors to build the resort and pay off its existing debt. The Tuscan-themed project includes a permanent casino and 255-room hotel with a spa, meeting rooms, restaurants, shops, gardens and terrace plaza.

Now, the tribe is scaling back its plans to borrow money for the project.

"In light of prevailing credit market conditions, pursuing the financing for the full resort expansion project at present is not practicable," River Rock said in a Sept. 5 filing with U.S. securities regulators.

The tribe's scaled-down financing plan would raise nearly $126 million for the first phase of the project, including new roads and a land purchase. In a complex series of transactions, River Rock also is arranging a $25 million term loan and buying down its existing debt by $30 million.

River Rock, which opened in 2002, generated $139 million in net sales in 2007. The 62,000-

square-foot facility, which attracts between 2,000 and 3,000 guests a day, has 1,600 slot and video poker machines, 22 table games and a restaurant.

Revenue and profits have fallen in 2008 as the gaming industry felt the impact of high gas prices and the economic slump. River Rock's net sales dipped by more than $1 million in the quarter ending June 30, with the casino's win-per-slot dropping by $20 per machine per day.

The impact was even greater on River Rock's profits, according to Standard & Poor's. The casino's adjusted earnings have declined 14 percent in the first half of 2008, it said.

Under the proposed River Rock financing plan, the casino's cash stream will be "permanently impaired" by payments required to service $126 million in new debt, according to Moody's. Those payments are expected to be $11.5 million in 2009.

"We see that as moderately negative," said Jacques Ouazana, a corporate finance analyst at Moody's in New York. "This is something that affects the cash flows of River Rock."

River Rock had a cash balance of $44.3 million on

June 30, but the balance will drop with increased capital spending, Moody's report said.

A rating downgrade is likely if River Rock's performance continues to slide and earnings fail to cover all debt payments, according to Moody's.

With River Rock's proposed financing, the ratio of debt to earnings is a concern, said Craig Parmelee, a managing director at Standard & Poor's in New York. The casino's credit rating could drop by one notch as a result of the review, according to the debt monitoring service.

Standard & Poor's current credit rating for River Rock is "B+", which is considered non-investment grade or "junk bond" status. To compensate investors for the higher risk, the casino's senior notes pay 9.75 percent interest.

Moody's cited several other factors that raise questions about the riskiness of the project.

River Rock is vulnerable to competition from a rival casino resort project proposed in Rohnert Park by the Federated Indians of Graton Rancheria and Station Casinos, Moody's said.

The Alexander Valley casino has a history of management turnover, with three chief financial officers and two chief executive officers in three years, the rating agency said.

Still, River Rock should benefit from a state liquor license, which allowed the casino to start selling alcohol in June, Moody's said.

Growth of Indian gaming was starting to slow even before the current economic slump, said Alan Meister, a Los Angeles economist who studies tribal casinos. In California, tribes have a limited number of slot machines, he said.

With the economy in a tailspin, tribes may be thinking twice about big capital projects, Meister said.

"It's not the best time to be expanding," he said. "You expect tribes to be cautious."

While tribes have partnered with Las Vegas gaming companies in the past, they're increasingly turning to the capital markets, Meister said.

"It's only in the past few years that tribes have been taking on debt of this sort," he said.

The Associated Press contributed to this report. You can reach Staff Writer Steve Hart at 521-5205 or steve.hart@pressdemocrat.com.