We wrote a post last month about the likelihood that Herbst Gaming will have to file for Chapter 11 bankruptcy protection from its creditors if it is unable to alter its payment structure for $1.14 billion in debt.
The company is privately held by brothers Ed, Tim and Troy Herbst, but roughly $371 million of its debt is through publicly traded bonds, which have been negatively affected by the fall-out from the subprime mortgage crisis.
Now there is more terrible news for Terrible Herbst.
On Wednesday, Moody’s Investment Service lowered its bond credit ratings for Herbst Gaming. The bonds were cut from B3 to Caa2.
Standard & Poor’s also cut Herbst’s credit rating, from B to CCC.
In addition, Standard & Poor’s announced that it had placed Herbst Gaming on a “developing watch,” indicating an ongoing reevaluation of the credit quality of Herbst’s debt obligations and the likelihood that its credit rating will be downgraded further.
Bonds rated A (“investment grade”) are judged to be of the highest quality, with minimal credit risk; bonds rated B (“junk bonds”) are considered speculative and are subject to high credit risk; and bonds rated C (also “junk bonds”) are judged to be of poor standing and subject to very high credit risk.
Moody’s said the downgrade took into consideration that Herbst Gaming may not meet its financial obligations in 2008.
“It remains unclear at this time what course of action the lenders may pursue with respect to the event of default,” Moody’s said. “The downgrade acknowledges that the continued volatility in the capital markets along with the high cost of borrowing makes it less likely that a strategic alternative will emerge that does not involve some level of impairment.”
The rating actions came after Herbst Gaming said it had engaged Goldman Sachs for evaluation of strategic and financial alternatives. These alternatives may include a re-capitalisation, refinancing, restructuring or re-organisation of the company’s obligations or a sale of some or all of its businesses.
So far, Herbst Gaming has been unable to negotiate a forbearance agreement with its lenders.
For the lastest news on Standard and Poor’s Ratings Services lowering its rating on Herbst Gaming’s notes ‘D’ from ‘C’, following the Herbst’s failure to make an interest payment on June 1, 2008, and on the debt crisis across the casino industry, click here.