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May 28, 2015

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Moody’s: Fontainebleau could default on debt

Due to the worsening economy and decline in visitation numbers in Las Vegas, Fontainebleau Las Vegas won’t be able to sell enough condos to reduce construction debt by the time the resort opens later this year, Moody’s Investor Service said today.

Although the company appears to have sufficient cash to complete the project, the negative rating outlook reflects that Fontainebleau could default on debt obligations if visitation to Las Vegas doesn’t significantly improve, Moody’s said.

The $2.9 billion Strip resort, under construction north of the Riviera and south of the Sahara, is expected to open in October with 3,185 rooms. Developers hope to sell as many as 1,000 of them as condo-hotel units.

"Visitation to Las Vegas and gaming demand in general continues to drop and is not likely to rebound to any significant degree in 2010," Moody's said. "As a result of these adverse market conditions, peak construction debt will be materially higher than originally projected and earnings are likely to be substantially below initial expectations. Thus, the company's ability to meet its debt service burden once the project opens is in jeopardy."

The ratings agency downgraded Fontainebleau’s corporate family and probability of default rating from Caa1 to Caa3, with a negative outlook. Moody’s last rated Fontainebleau in November when the same rating was downgraded to Caa1. Second mortgage notes were downgraded from Ca to Caa3.

About $2.4 billion of rated debt is affected, Moody’s said.

The S&P, which rates the bonds of major gaming operators, slashed earnings projections and credit ratings for Fontainebleau last month.

The rating agency lowered its corporate credit rating on Fontainebleau Las Vegas Holdings LLC to "CCC" from "B-", cut the rating on the resort's $1.85 billion in senior secured notes to "CCC" from "B" and lowered the rating on $675 million second mortgage notes to "CC" from "CCC.”

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