Rationale
The outlook revision reflects our view that Peermont faces substantial
refinancing risk due to its complex capital structure and significant debt
maturity in 2014. The refinancing risk relates to the group’s euro-denominated
bond that matures in 2014, because management informs us that it is in the
latter stages of extending the revolving credit facility (RCF) by less than
one year to December 2013 on the same terms. Peermont’s Standard
Poor’s-adjusted EBITDA interest coverage remains weak, in our view, and we do
not believe that it will improve without extensive refinancing.
In our opinion, Peermont’s current capital structure is unsustainable and
there is an increasing risk of the group undertaking credit-dilutive debt
restructuring measures. We are monitoring this risk closely because we view
such debt restructuring as tantamount to a default under our criteria. We
think that Peermont faces various challenges in refinancing its capital
structure and we assess its liquidity as “less than adequate” as defined by
our criteria.
Peermont is currently reviewing its capital structure alongside discussions to
refinance its 2014 debt maturity. We think that a refinancing may entail the
conversion of parts of its subordinated debt into equity. The outcome of the
review is likely to be significant in terms of the evolution of Peermont’s
liquidity and capital structure. However, the timing of the eventual
refinancing or restructuring of the bond is currently uncertain because this
remains subject to a consensus among the relevant stakeholders, and we
understand that it may require a fresh equity injection.
We assess Peermont’s financial risk profile as “highly leveraged.” This
reflects our view of the group’s high leverage, complex capital structure, and
weak credit protection metrics. We consider Peermont’s adjusted EBITDA
interest coverage to be weak, at less than 1x. In our view, this is unlikely
to improve on a sustainable basis in the short to medium term due ongoing
margin compression driven by rising labor costs and sluggish growth in leisure
spending.
We continue to assess Peermont’s business risk profile as “weak,” reflecting
its dependence on one site (the Emperors Palace casino complex in South
Africa) and cyclical pressure on margins on account of material inflation of
labor costs and weak discretionary leisure spending. These factors are
mitigated to some extent by Peermont’s established position in South Africa’s
gaming market; the strength of its margins compared to those of its
competitors; the good location of its main properties; and high barriers to
entry due to regulation and fully allocated licenses.
Liquidity
Continued…
