Chicago project execution concerns, Fitch downgrades Bally’s to B-
Fitch Ratings has downgraded American gambling and betting major Bally’s Corporation from ‘B’ to ‘B-.’ According to the Wall Street rating agency’s commentary, this decision primarily reflects concerns over the “execution risk in the development of the Chicago projects” alongside the company’s elevated debt levels, casting a shadow over the ambitious $1.7 billion permanent casino venture in Chicago.
Bally’s envisioned its Chicago casino as a flagship property, crucial to its growth strategy in a potentially lucrative market.
Fitch Ratings lowered Bally’s Issuer Default Rating (IDR) to ‘B-‘ from ‘B’, stating the downgrade was “mainly attributed to Bally’s high leverage exceeding Fitch’s downgrade sensitivities, which is anticipated to stay high for a longer period.” The report further elaborates that “the development of the Chicago projects and other potential development opportunities present execution risks.“
Specifically, Fitch analysts pointed to several challenges associated with the Chicago development. These include “a saturated Chicago gaming market, a higher-than-average gaming tax rate, and the typical ramp-up of a new casino development.” The agency also highlighted the company’s overall financial health, noting, “The Negative Outlook underscores leverage concerns, with Bally’s operating near Fitch’s 8.0x downgrade sensitivities. Fitch calculated Bally’s 2024 EBITDAR leverage at 7.0x, which is expected to rise to the 8.0x-9.0x range in the near term due to new debt issuance and higher lease-adjusted debt.“
Financial strain and the funding pathway for the $1.7 billion project
The Chicago casino project requires a significant financial outlay, estimated at $1.7 billion. Fitch analysts suggest that Bally’s may need up to $450 million in additional funding to complete the development, anticipating this will likely be drawn from the company’s revolving credit facility, which matures in October 2026. The Fitch report notes that “the company is obligated to contribute up to $450 million of additional funding to complete the Chicago project, which Fitch expects will likely be funded by the revolver, barring any potential asset sales. The revolver matures in October 2026, and any outstanding amounts must either be extended or refinanced.“
To mitigate funding pressures, Bally’s has an agreement to sell and lease back the Twin River Casino to Gaming & Lodging Leisure Properties, Inc. (GLPI) for $735 million. While this transaction could ease the financial burden of the Chicago project, Fitch stated that “although the sale proceeds could ease Bally’s Chicago contribution burden, the covenant resolution remains uncertain.” This sale-leaseback will also result in an annual rent payment of approximately $58.8 million for Bally’s.
Broader market reaction
The share price of the New York Stock Exchange-listed Bally’s Corporation has fallen over 20 percent in a month and close to 43 percent during the last six months.
In the company’s annual report released on March 5, Bally’s CEO Robeson Reeves said, “The temporary Chicago casino returns remain below our expectations, though we are hearing from customers that they are increasingly excited by what is starting to happen a few blocks northwest at the permanent site.”
According to Fitch analysts, the factors that could individually or collectively lead to a positive rating action/upgrade are a sustained EBITDAR (earnings before interest, taxes, depreciation, amortisation, and restructuring or rent costs) leverage below 6.0x, an EBITDAR fixed charge coverage ratio above 1.5x, and a resolution on Chicago funding commitments and revolver maturity.
