Tuesday, 19 January 2016

Great Canadian Gaming 6.625% Callable Unsecured Notes

Quick post on Great Canadian Gaming Corporation.

In the last couple of weeks, the stock has rallied while the overall market has not, so I look at this as a clue that something may be up.

Here's the chart:

On Jan 11, 2016, GC announced the closing of a deal to operate casinos / facilities in Ontario. The company had previously disclosed that it was in the bidding for the license.  Here's a link to the press release and an excerpt from it, describing the win:

So, I take this to mean the following:

  • The company is diversifying it's exposure base away from Western Canada to Ontario with this win.  Prior to the win, the Company had revenues of approximately $330M from existing facilities over the 9 months ended 09/30/15.  The OLG win gives them a minimum guaranteed fixed fee component of $15M per year (before Belleville is opened), and $24M thereafter, and a variable component = 70% of gross gaming revenue plus a fixed amount for approved capx + 100% of non-gaming revenue.  Even if the variable component is 0% (unlikely), the OLG piece is somewhere between $15M & $24M depending on when Belleville opens.
  • EBITDA would have been $16-$17M had the OLG win been in place for the year.  Here's the 09/30/15 P/L for reference:

I get EBIT of around $103M annualized (excluding new OLG).  EBITDA should be $103M + $28.9/9*12 = $38.5M, so EBITDA margin = ($103M +$38.5M) / $332.7/9*12 = 32%

Quick and dirty, taking the low end of their pro-forma range of $16M and applying overall company wide EBITDA margin, I get pro-forma revenues $16 / .32 = $50M.  $50 / $443M = 10% incrementally

Here are the bonds as listed at TD yesterday:

Apart from Corus 4.25%, these bonds are the only other BB+ rated bonds, and I think there's an opportunity here for a number of reasons:

  1. The bonds have come down in price along with all other high yield bonds
  2. I think the bonds reflect uncertainty re: Western Canada and specifically, consumer discretionary activity related to Western Canada
  3. The bonds appear to be well covered, not only by virtue of my muppet math above, but also based on analysis of the company's most recent balance sheet, which looks pretty clean, see below, there was cash on hand of around $291M vs. LTD of $443M, and the company generates positive cash flow
  4. The incremental cash flows from the OLG win should be credit positive, which is why I think the equity has rallied
  5. The bonds are callable at 101 anytime before July 25, 2017 according to the indenture, clause a) see below, and the company has already recalled one issue back in 2012 to take advantage of cheaper available cost of funding in the credit market, see below

Here's the balance sheet


Here's the indenture clause re: the call provision

Here's the press release on the last call back in 2012, where they called early and refinanced at 6.625% down from 7+%.

And here are the historical #'s demonstrating interest coverage and FCF (not including the OLG win):

Concluding Thoughts

I bought $5K face value of the bonds at 100.1 + accrued interest (next coupon is Jan 25th, so I've effectively paid $6 accrued interest).  I believe the bonds will get redeemed, it's just a question of when, as they will need to tap into access for financing to perform required capital improvement in respect of the OLG win.

My best case scenario is that the bonds don't get redeemed until after July 25, 2017 and they're redeemed at 103, but I don't know why the company would do this when they can save 200 bps and redeem them at 101 prior to July 2015.

My worst case is that I'm completely wrong.  Always a possibility.

My mid case scenario is that they get redeemed in less than 1 year at 101.

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