Thu 07/09/2020 17:34 PM
Relevant Items:
Debt Documents
Covenants Tear Sheet and Debt Document Summaries

The below article includes new analysis of Monarch Casino & Resort Inc. as well as an issuer covenant card from the Covenants by Reorg team. Request a trial to access the accompanying debt documents

Monarch Casino owns and operates the Atlantis Casino Resort Spa, a hotel and casino in Reno, Nev., and Monarch Casino Black Hawk, a casino in Black Hawk, Colo. The company is the borrower under a $50 million first lien revolver and a $196.3 million term loan, along with various subsidiaries. Continue reading for the Covenants by Reorg team's analysis of the company's debt documents.

Below we discuss recent events, including a June amendment to the credit agreement that governs the company’s revolver and term loan.

Monarch’s capital structure as of March 31 was as follows:
Covenants by Reorg team's capital structure for Monarch Casino & Resort Inc. as of March 31, 2020

 
Recent Events

In mid-March, the company announced a temporary suspension of operations at both of its casinos and in mid-April disclosed that it had indefinitely furloughed employees, without pay, but would continue to provide employment benefits.

The company has recently had various dealings with its revolver and term loan lenders. In April, the company obtained waivers for certain covenant provisions and also a waiver for a $5 million amortization payment that was due March 31. The company obtained an amendment on June 9 that fixed the applicable margin at L+250 bps from L+100 to 250 bps (based on total leverage) and waived any financial covenant defaults that occur before Sept. 30, in exchange for adding a $25 millon liquidity requirement, along with certain other changes discussed below.

In addition, the June amendment provided waivers for defaults related to the company’s failure to operate the Atlantis Casino Resort Spa (before June 9) and the Monarch Casino Black Hawk (before Sept. 30) and added similar waivers for construction stoppage of the Black Hawk expansion projects (before Sept. 30). The Atlantis and Black Hawk facilities reopened in June.
The Amended Credit Agreement

The revolver and term loan agreement contains a 3.5x total leverage maintenance covenant (tested at all times) and two quarterly-tested financial covenants, a 1.15x fixed charge coverage covenant and a $45 million minimum EBITDA requirement. The June amendment suspended those three covenants through Sept. 29, and the company will again be required to comply with those covenants beginning Sept. 30.

In addition, the amendment added a $25 million minimum “operational liquidity” requirement that will be tested through the maturity of the loans, commencing with the June amendment. Operational liquidity is defined as loan party cash and revolver availability, to the extent such amount exceeds $24 million minus any retainage costs related to the Black Hawk expansion project and any cash settlement or judgment related to certain construction contract litigation regarding the expansion. Upon the resolution of those situations, operational liquidity is then simply calculated as loan party cash plus availability. There is now also a monthly reporting obligation through maturity.

The amendment further added restrictions on the company’s ability to draw on the revolver. Any draw must be “reasonably necessary” for operations in the next 30 days, the company must use any revolver draws cumulatively in excess of $26 million to pay retainage costs for the expansion projects, and no draw may be made until resolution of certain litigation related to the Black Hawk expansion projects.

One notable change that was not included in the amendment was it did not include a mechanism to annualize EBITDA following the relief period. Many other recent casino company amendments allow those companies to annualize EBITDA for periods following the covenant relief period and thus avoid including periods during which EBITDA was affected by the Covid-19 pandemic. For Monarch, EBITDA declines from quarters in which the company’s facilities were closed will be reflected in calculating ratios under the agreement. For the period ending March 31, which included only two weeks during which the company’s facilities were closed, the company reported a total debt to EBITDA ratio under the credit facility of 3.5x, suggesting there is no cushion for EBITDA to decline. Therefore, an additional waiver or amendment may be necessary to avoid a default when the total leverage covenant is tested on Sept. 30.

Basket capacities under the agreement are generally limited, both before and following the amendment. As amended, the credit agreement contains the following capacities: additional secured debt under the revolver of $50 million, structurally senior or unsecured debt of $10 million, no dividends or prepayments of other debt, and $5 million of asset transfers to excluded subsidiaries.

--Jeff Brenner
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