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Revel Opens with High Hopes - and $1.1 billion of Debt on its Atlantic City Casino

Credit Ratings Giant Warns of Vulnerability

By Donald Wittkowski, The Press of Atlantic City, Pleasantville, N.J.McClatchy-Tribune Regional News

April 02, 2012--Revel, the megacasino that opens in Atlantic City today, faces a huge $1.1 billion debt load that Wall Street experts and New Jersey gaming regulators believe could become a heavy financial strain.

Standard & Poor's, the New York-based credit ratings giant, warns that Revel will be "vulnerable" if its business plans fall short. S&P has assigned a "negative outlook" to the casino operator's debt.

"Our negative rating outlook on Revel reflects our belief that Revel will be challenged to generate the substantial level of cash flow necessary to accommodate debt service obligations under its capital structure," S&P wrote in an analysis of Revel's financing.

Linda M. Kassekert, chair of the New Jersey Casino Control Commission, cautioned that Revel's financial projections -- the money that will pay the company's debt and operating costs -- appear "extremely ambitious."

The commission approved a license for Revel last week, finding that the company met the financial stability standards required of all Atlantic City casinos. During the licensing hearing, Kassekert pointedly asked Revel's chief investment officer, Michael Garrity, whether the company had a backup plan in case "things go really bad" and Revel falls behind its financial forecasts.

"We feel very comfortable with the numbers we have," Garrity replied.

Garrity explained that Revel has already set aside enough money for seven months of debt payments and expects to secure a $50 million revolving credit line by mid-April as an extra cushion.

"If we can create a compelling enough product and a compelling enough experience, then our premise is that we can do quite well," Garrity said of Revel's high expectation for success.

After the commission meeting, Revel Chief Executive Officer Kevin DeSanctis declined to discuss the S&P analysis or divulge the amount of Revel's debt payments. He noted that Revel has a "runway" of two years to strengthen its finances based on its capital structure.

"Over time, we will fix our capital structure," DeSanctis said in an interview with The Press of Atlantic City.

Revel, which cost $2.4 billion overall, took on new debt after its chief financial backer, Morgan Stanley, withdrew from the then-troubled project in 2010. Morgan Stanley had invested about $1.2 billion. Without Morgan Stanley's continued support, the project ran out of money. Revel secured $1.1 billion in new financing in early 2011 to finish construction. The funding package consists of an $850 million loan arranged by JPMorgan Chase and $304.4 million in notes.

Revel's financing plan is aided by $261.3 million in state tax reimbursements over the next 20 years. Under the tax agreement, up to $70 million can be pledged as coverage for payment of Revel's notes. In turn, New Jersey could receive an amount equal to 20 percent of any cash dividend paid to Revel's management stockholders, according to the state Division of Gaming Enforcement.

The division investigated Revel's finances as part of the casino's licensing. In its report, the division concluded that Revel is financially stable, but it signaled some concerns based on Atlantic City's struggling casino market and the intense competition Revel will encounter.

"Given the physical characteristics of the facility and the excitement surrounding a new casino, the Division expects Revel's revenue results to be strong. It will be challenging, however, for Revel to generate the revenue levels projected in the forecasts," the report said.

Kassekert said the division found enough flexibility in Revel's funding plan to withstand any potential shortfalls in the financial forecasts. Further, the division intends to closely monitor Revel's finances to provide extra safeguards, Kassekert added.

Revel's profit and revenue projections remain a secret. The information, considered proprietary, was redacted from the public portion of the division's report. Such information is routinely removed from casino licensing reports, not just Revel's.

However, S&P's analysis estimated that Revel will have annual principal and interest payments of approximately $150 million. S&P projected Revel will generate about $615 million in total net revenue and $165 million in gross operating profits in 2013, its first full year of operation. S&P also predicted Revel's operating performance will improve gradually, in the mid-single-digit percentage range, thereafter.

Revel is expected to vie with Borgata Hotel Casino & Spa as Atlantic City's top-earning casino. In 2011, Borgata had net revenues of $730.3 million and operating profits of $158.1 million, parent company Boyd Gaming Corp. reported in February.

In assessing Revel's financial underpinnings, S&P noted the casino has a business model that relies heavily on a distinct customer base -- cash-paying overnight guests seeking a resort-style experience and convention groups. S&P stressed that Revel must quickly kick into high gear to make its business plan work. S&P said it expects Revel to become Atlantic City's premier casino, but warned of challenges ahead.

"Our assessment of Revel's financial risk profile as highly leveraged reflects our belief that it will find it hard to ramp up cash flow generation to a level sufficient to satisfy debt service obligations under the capital structure, and our expectation for relatively weak credit measures," S&P wrote in its analysis.

In the casino's favor, S&P noted it has established a reserve fund to handle interest payments on its debt for several months after it opens. S&P also pointed to Revel's $50 million revolving credit line and the tax agreement with New Jersey as additional financial safety nets for the casino.

Contact Donald Wittkowski:



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