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Ameristar Casinos, Inc. (NASDAQ:ASCA)

Q4 2008 Earnings Call

February 10, 2009 1:00 pm ET

Executives

Gordon R. Kanofsky - Chief Executive Officer and Vice Chairman

Thomas Steinbauer - Chief Financial Officer

Analysts

Larry Klatzkin - Jefferies

David Katz - Oppenheimer & Co.

Dennis Forst - KeyBanc Capital Markets

Joseph Greff - JPMorgan

Ryan Worst - Brean Murray, Carret & Co.

Justin Sebastiano - Morgan Joseph & Co., Inc.

Steve Altebrando - Sidoti & Company

John Grassano - Buckingham Research

Dennis Farrell - Wachovia

Operator

Welcome to Ameristar's 2008 fourth quarter and year end earnings conference call. (Operator Instructions)

Before we get started, I would like to remind you that a slide presentation is available on Ameristar's website, www.Ameristar.com, in the Investor Relations section under the Quarter Results Conference Calls. This presentation corresponds with comments that will be made in the call and provides additional useful information with regard to financial results.

During the course of this conference call, the company will state beliefs and make projections or other forward-looking statements regarding future events and the future financial performance of the company. We wish to caution you that such statements are just projections and expectations and that actual results or events may differ materially. I refer you to the forward-looking statements section in both the slide presentation and in the news release issued earlier today about the company's fourth quarter financial results, which also is available on the company's website.

In addition to the company, we'll discuss EBITDA, adjusted EBITDA, and adjusted EPS, which are non-GAAP financial measures. A definition and reconciliation of these measures to the most comparable GAAP financial measures are included in both the news release and the slide presentation.

It is no my pleasure to turn the call over to Gordon Kanofsky, Ameristar's CEO and Vice Chairman. Please go ahead.

Gordon R. Kanofsky

Thanks, [Julianne]. I'm joined here today by Tom Steinbauer, our Chief Financial Officer, and we're very pleased to have an opportunity to talk with you about our fourth quarter and year end financial results.

Turning to Slide 3, I'd say it's sort of table of contents for what we're going to cover today. I'm not going to read through it all there - I'm sure you all have the slides in front of you - and we'll get straight into Slide 4, which is a bit of our headline.

The big headline is our focus on efficiency is yielding demonstrable results. We're really pleased with what we've produced in the fourth quarter and the trend lines coming from there. We've also had obviously the success in the ballot initiatives in Missouri and Colorado, already seeing the growth there and Missouri yet to come - in Colorado, along with the hotel.

And also despite the strength of Ameristar's balance sheet, the economic softness that's present everywhere is obviously putting a little stress on the scheduled declines later this year in our senior leverage ratio covenant under our credit facility and we're actively seeking an amendment to resolve that, give us the breathing room that we need.

But let's focus mostly right now on the efficiency efforts that we have been implementing over the last six months. Several months before the severity of the recession kicked in and was comprehended by much of the country, we decided that we needed to position ourselves for any eventuality that could happen with the economy. And even though the economy actually turned out far worse than any of us had expected at that time and I think probably the same goes for all of you, we focused very much on implementing efficiencies from the operating standpoint as well as marketing, including our promotional spending, labor and other costs.

The good news is that's turned into real, tangible results. We had a $1.9 million improvement in adjusted EBITDA in the fourth quarter, notwithstanding a $9.1 million decline in net revenues. And embedded in those numbers of $2.6 million of severance costs in the fourth quarter, which makes the results even more outstanding.

As a result of what we've implemented so far in efficiency efforts, we're on track to generate $45 million in annualized savings. And we've done that, I think, without diminishing anything in the guest experience. Labor adjustments account for about half of that $45 million.

We've also taken a good whack at the promotional spending. Even though promotional allowances are up $2.3 million over the fourth quarter of 2007, most of that is related to the efforts to promote the St. Charles Hotel and on a trend line basis they're actually $12.4 million less than in the third quarter of 2008.

We've also implemented a lot of controls on the food and beverage operations as well as throughout the entirety of the operation. Every department at every property as well as at corporate has taken a very hard look at their business and made adjustment to allow us to operate more leanly and more efficiently.

We continue to look for additional ways to improve our margins.

Turning over to Slide 5, I think it says what we've accomplished even better than any words that I can use. This graph shows the year-over-year same-store quarterly changes in net revenue, adjusted EBITDA, and adjusted EBITDA margin, obviously on a same-store basis. East Chicago's excluded since we didn't own it for the full year in 2007.

As you can see as the quarters trudge along, the net revenue trends are very unfavorable, but we significantly improved our margins, resulting in a favorable adjusted EBITDA trend despite the recession, the Black Hawk smoking ban, and increased competition in two markets. We're really proud of these results and I applaud the entire operational team and everybody throughout the company for making them come through. And again, these results - since adjusted EBITDA includes severance costs - they're not netted out in here. If they're netted out, this graph would be even more impressive.

Turning to Slide 6, talk a little bit about what has happened in Missouri following the loss limit removal. As you know, Proposition A removed the loss limit as well as the boarding card requirement and also placed a moratorium on new gaming licenses. It also provided for a 1 percentage point increase in the gaming tax from 20% to 21%.

It went effective on November 7th. We implemented it within hours. We're still making various operational changes in the pits and the entryways and the like to take advantage of the benefits of Prop A, and our marketing efforts to introduce loss limit free gaming in Missouri is really just beginning. Early results support our previous statements that our $7.6 million investment in the ballot initiative will generate a very significant return on investment.

We experienced a 12% increase year-over-year in table games drop in December. When we look at a number of other regional markets, we're seeing a significant lift in Missouri that we believe is directly attributable to the loss limit removal. And we're especially pleased with the January market share numbers that were released by the Commission earlier this morning, showing that we've retaken the market share lead in St. Louis as well as very strong results in Kansas City.

I think there's certainly been back and forth in the market share lead in St. Louis. Some of it's been capital investment driven; some of it's been promotional spending driven. There's really no year-over-year change or sequential change in the competitive environment from a capital standpoint. I think some of the other competitors have been adjusting their promotional spending and visitors and guests have been looking, then, at the quality of the experience that they get and are favoring Ameristar over the others. So we're very pleased with what we're seeing out of those trends in Missouri this morning.

And obviously the Illinois boats are losing a little bit of market share since loss limits have come off.

Turning over to Slide 7, another growth initiative under way in Colorado. The local voters in Black Hawk approved an implementing referendum last month by an overwhelming margin that will allow us and other operators in Black Hawk to proceed with the implementation of Amendment 50 on its effective date of July 2, 2009. Most importantly, that allows us to go from an 18houraday operation to 24 hours a day, increase the bet limits from $5 to $100, and add roulettes and craps. With the hotel and spa opening shortly following the effective date and that 24hourgaming will be a big advantage for the hotel and spa. Those remain on-budget, approximately $235 million, and on schedule. We'll get them open in the early fall. So we're expecting the dove-tailing of Amendment 50 and the hotel will really help us offset the market decline caused by the smoking ban.

Now I'll turn it over to Tom, who'll cover some more granular financial results.

Thomas Steinbauer

Thanks, Gordy. Good morning, everyone.

Turning to Slide 8, net revenues decreased just 3% in Q4 over 207. For the year, net revenues increased 17.3%. This was due to a full year of results being included in '08 for East Chicago. On a same-store basis, net revenues declined 2.2% for the year as a result of the nationwide recession and the smoking ban in Black Hawk. After factoring out impairment charges, ballot initiative costs, transition and rebranding costs and pre-opening expense, Q4 adjusted EBITDA increased 2.8% year-over-year. If we were to add back severance costs in the fourth quarter, that increase was approximately 6.6%.

For the year, adjusted EBITDA increased 10.7%. Same-store adjusted EBITDA dropped 2.7% from 2007. If we were to add back the difference in year-to-date severance costs, the increase would have been 12.8% instead of 10.2%. The effect of the severance costs on EPS for the quarter would be basically moving it to $0.23 versus $0.22 last year and $1.24 on a year-to-date basis this year versus $1.29 last year. These improvements are directly due to the implementation of operating efficiencies mentioned earlier by Gordy.

Turning to Slide 9, I'll cover some of the balance sheet statistics. As you can see, we did an excellent job in managing cash this year. We lowered our cash carrying value to $65 million from approximately $100 million at the end of last year. We reduced construction in progress by about $184 million. There's still approximately $177 million in construction in progress. The big reduction was obviously due to the completion of the St. Charles and Vicksburg projects. The majority of what's in construction in progress at 12/31 is Black Hawk and that's approximately $163 million.

Total debt was flat to the end of 2007. Net borrowing increase in '08 was just $2.5 million.

We were in compliance with all of our debt covenants at 12/31/08. The key one, senior leverage ratio, we were at 5.14. The maximum that we could have at this point in time is 5.25. Our fixed charge coverage ratio was a little over 3, which was more than double what's required by our credit facility. Subsequent to 2008, we've borrowed an additional $24 million under our revolver.

Related to our credit facility, we tend to work on ensuring compliance over the next quarter or so with our senior coverage ratio. We are active in discussions with our senior lenders concerning an amendment to the credit facility to maintain that compliance, and obviously any changes to the credit facility will result in increases in interest rate and fees. Pending any amendment to the senior leverage ratio, we are continuing to carefully monitor our cash.

We also entered into another swap early in the fourth quarter on $600 million. It has a length of 21 months. We now have 67% of our floating rate debt hedged, with approximately an average borrowing rate of 3.08%, plus the current add-on of 175 basis points.

Turning to Slide 10, this slide gives you a few benchmarks to base your projections on in '09 for the first quarter. We're anticipating share-based compensation to be $2 to $3 million in Q1. Our blended state tax rate in '09 should be in the 43% to 44% range. It's slightly different this year and one of the main reasons for this year's variance in the tax rate is the impairment loss in Chicago, where we have a high state tax rate, and the ballot initiative costs, which are considered lobbying costs, which are non-deductible for tax purposes in '08.

Total capital spending in the first quarter, we expect it to be in the range of $55 to $60 million. The majority of it, $40 to $45 million, will be in Black Hawk, the balance basically in maintenance CapEx. And with that level of expenditures, we expect our net borrowings for the quarter to end up being approximately $14 to $16 million.

Interest expense is expected to be lower in the first quarter despite our higher borrowing level and despite lower capitalized interest due to the lower average interest rate that we'll be paying in the first quarter compared to last year.

With that, I'll turn the call back over to Gordy. Thank you.

Gordon R. Kanofsky

Thanks, Tom.

Turning over to Slide 11, we'll cover a few governmental affairs topics. In Illinois, I think as everybody knows, late last year the Illinois Gaming Board awarded the 10th dormant license in the state after many years of controversy for a development in Des Plaines, which is near O'Hare Airport. It's about 40 miles northwest of East Chicago. Based upon the demographics that are built into our customer list, we really don't see a lot of impact to us from a casino in that location. And, of course, like all Illinois casinos, it will be limited to 1,200 gaming positions.

The Gaming Board is going to commence a suitability investigation of the applicant. That's expected to take the better part of this year and maybe into next year, and I've read recently that some of the local permitting is a fairly long, drawn-out process in Illinois. So I think the earliest construction could begin on that is probably early next year in 2010 and so it's going to be awhile before we even see competition in the Northwest Indiana market. And, as I said, I don't expect it to impact Northwest Indiana a lot.

In Indiana there's been a lot of stuff going on in the legislature with respect to a smoking ban on a statewide basis. We're cautiously optimistic that if that does get traction that there will be a casino exemption built into it. It's obviously something we're paying a lot of attention to and working with our governmental affairs team and lobbyists to have conversations with legislators about the impact that smoking bans have had in other states, particularly next door in Illinois as well as what we've seen in Colorado. So, again, we're cautiously optimistic, but it's a process that will take a few more months, I think, to play out.

In Iowa, in late December a federal judge ruled that the Ponca Tribe cannot build a casino at Carter Lake, just as we had expected it would based on the merits of the case. That ruling reversed a December 2007 National Indian Gaming Commission decision. The lawsuit was brought by both the States of Nebraska and Iowa as well as the City of Council Bluffs. The Ponca Tribe has filed a motion to reconsider. I expect that to be denied, and I expect the Ponca Tribe to file an appeal following that, so that legal battle will draw on for quite awhile. I don't believe that they ultimately will be successful in the litigation, but even if they are, there would then be an extended period for compact negotiation and construction. So I think any competition that might arise there is several years off into the future.

And in Kansas, I'm sure all of you have followed that and are aware that the last remaining applicant - I believe there were four or five applicants initially for the Wyandotte County license  withdrew its application just hours before the Lottery Commission was going to make a decision in early December. They cited the economy as the main reason for their decision. I suspect that the passage of the loss limit initiative in Missouri also had some impact.

Their initial project was going to be $705 million in development costs. They have announced that they plan to file a new bid in April, when bids are due, for a scaled down project of less than half of that, about a $250 to $350 million project. It will obviously take the Kansas Lottery Commission several months to process and deal with the applications and then after that there would be some period for construction. This is a situation also that we're monitoring very closely, but I think it's quite aways off before we'll see some competition in that market.

Turning over to Slide 12, looking at the outlook, we obviously expect continuing revenue challenges in 2009. The economy continues to limp along. It ultimately will recover, but in the meantime there's going to be some downward pressure on the revenue stream and we've obviously got increased competition in two markets, in Vicksburg and Northwest Indiana with the opening of a facility in Vicksburg and a greatly expanded facility in Northwest Indiana in recent months.

But we'll continue to be proactive in watching our bottom line and implementing efficiencies to improve our margins. We think we're very well positioned to withstand the economic downturn and obviously the ballot initiatives, coupled with the Black Hawk Hotel coming online later this month, those three markets account for about 60% of our EBITDA, so we'll expect to see some very strong results out of our concentrations in those jurisdictions.

So we'll turn the call over to questions in a minute. Before we do that, I just want to remind everybody again that I'm here in my capacity as an officer of the company and not as a representative of the Estate of Craig Nielsen, so I'll not be taking any questions related to the 13D or disclosures made by the estate.

And with that, we'll turn it over to questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from Larry Klatzkin - Jefferies.

Larry Klatzkin - Jefferies

A couple questions here. One, corporate expense for the first quarter and going forward, you're not spending the kind of money on other stuff. What should we be looking for?

Thomas Steinbauer

It's in the range of about $12 million not counting the share-based compensation.

Larry Klatzkin - Jefferies

And are you seeing any indication that Vicksburg's margins might recover? Is it going to take some period of time to really get that back up to what it used to be or is it permanently infringed?

Thomas Steinbauer

That's a function, partly, of market share and where that finally levels out. I doubt if we will see the same margin when we had a 51% - 52% market share; however, we are still managing costs and looking at costs, significant cost adjustments there based on volume. And obviously, when you open up a new facility there are always increased expenditures related to that facility and so we expect additional efficiencies as we continue to improve the performance there.

Larry Klatzkin - Jefferies

My last question has to relate to just, you know, the whole bank financing thing. I'm figuring if you hit the markets today, probably 200 - 225 basis points increase given the market and such. What kind of timing should we look for and when you might be dealing with this? Should we assume end of this year or could you really hold off to the next year before we jump up our interest expense?

Thomas Steinbauer

I don't think we're prepared to predict a timing of how we resolve our debt covenant issue and our maturity issue. Let's just say that we're diligently working toward resolving those issues at this point in time and are going to take advantage of what's been a slight improvement, probably, in the high yield market here recently.

Larry Klatzkin - Jefferies

As far as the opening date for the hotel, you're pegging September, would you say?

Gordon R. Kanofsky

Early fall. I think in another couple of months we'll have a much better visibility to be able to talk about when we can open the hotel, but early fall.

Operator

Your next question comes from David Katz - Oppenheimer & Co.

David Katz - Oppenheimer & Co.

Firstly, on Black Hawk, just thinking about the couple of moving parts that are happening at the property in the next two years being the regulations and the hotel. If you could give us some color about what your strategy is there. And presumably there should be a nice pop up in revenue from both, but in the past we've seen expansions from Ameristar drive a lot of revenue at the expense of profitability in the short term and then some margin improvement over time. Whatever color you can give us about sort of how strategically you're thinking about that property this year would be helpful.

Gordon R. Kanofsky

David, I think that with any property there's going to be some efficiencies when you open it. We're going to obviously keep those to a minimum and stay focused on the margins just like we have throughout the last many months on all of our operations, so we're keenly focused on that.

But I think Black Hawk/Central City market has suffered for many years by virtue of the quality of some of the operations from size and scope just not being very appealing and the $5 bet limit having an impact and the lack of any real luxury overnight accommodations and it being a very short flight to Las Vegas. The market has not really penetrated the demographics of the Denver market as well as it can.

We're hopeful and very confident that our property will help make inroads there. It's going to obviously take some marketing efforts to introduce the property. We're working very hard on a marketing plan to really introduce the property with all of its full accommodations to the Denver market. That said, there's still a smoking ban in Colorado and there's not in Las Vegas, so there'll be some issues that we have to face with that. But we think the property can do very well and become a destination resort for the Rocky Mountains.

David Katz - Oppenheimer & Co.

And then can we talk a bit about resorts. I think the surprise has been a pleasant one that trends there have been, I think, better than what most might have thought just given the competitive landscape. How much of this do you think is the misfortune of Majestic Star or other players in that market versus the property just finding some way to hold its own? If you could talk a little bit about the strategy there.

Thomas Steinbauer

I think we could talk about Majestic Star or other properties in the market, but I don't think that's necessary. And in a sense, we've implemented at that property the same strategy that we have at all of our other properties that have led to a great deal of the success in each one of those other markets, with very strong margins relative to the revenue levels and the strong customer service oriented employee base, quality food product, and our direct mail and marketing programs that have been successful everywhere else.

When we bought the asset we thought that all of those would be successful in Chicago and we think that the results there are proving us out and reinforcing the overall management and business strategy that Ameristar's had for years.

David Katz - Oppenheimer & Co.

And are you feeling any competitive pressure at all from Harrah's? I mean, that is quite a facility that they've opened and it just doesn't really seem to have shown up much in the numbers.

Thomas Steinbauer

It think the numbers speak for themselves. We're not buying market share there. We're not overspending in marketing, we don't believe. The performance of the property and the employees' dedication to service over time is paying real benefits in keeping our customer base against the far superior physical product, doing more than holding our own in the market.

Operator

Your next question comes from Dennis Forst - KeyBanc Capital Markets.

Dennis Forst - KeyBanc Capital Markets

Maintenance CapEx for next year, Tom, or this current year?

Thomas Steinbauer

In '09?

Dennis Forst - KeyBanc Capital Markets

Yes.

Thomas Steinbauer

We're looking at somewhere between the range of, let's say, $48 and $55 million.

Dennis Forst - KeyBanc Capital Markets

And would that be a reasonable number for 2010 also?

Thomas Steinbauer

If it was up to me, yes.

Dennis Forst - KeyBanc Capital Markets

So really there's not much in the way of project CapEx at all planned for 2010, is there?

Thomas Steinbauer

We intend to maintain the quality of the assets to provide our guests the experience that they have become used to in the last 10 years. So what we need to do in maintenance CapEx, we're obviously going to evaluate it very carefully and pick those projects that we believe will give us the most bang for the buck. But we intend to maintain the quality of these assets. And will it be $50 million or $60 million? I think it'll be in that range, but we're not going to let the quality and value of these assets deteriorate. We're in a cash position where starting in 2010 we don't have to do that.

Gordon R. Kanofsky

Right. And virtually all of the hotel rooms are either brand new or freshly renovated. Obviously, the Vicksburg expansion, we did some cleanup work in the existing casino in conjunction with that. So a lot of the assets are in very, very good condition. That's not to say that there's not some stuff that we need to spend some money on, as Tom mentioned, but we're not in a situation where our assets are going to deteriorate and we're not going to let them.

Dennis Forst - KeyBanc Capital Markets

That's the point I'm getting around to is that, given the condition of your assets, you should be able to make a fairly decent dent in the long-term debt next year.

Thomas Steinbauer

Yes, that's the goal.

Dennis Forst - KeyBanc Capital Markets

Talk about goals, what is the company's goal or strategy with share repurchases, dividend, etc.?

Gordon R. Kanofsky

I think once we get the debt amendment dealt with, the Board will likely revisit the dividend question, share repurchases or a similar concept and a function of a financial aspect of it, but I think dividends will probably be the preferred approach over the near term.

Dennis Forst - KeyBanc Capital Markets

So that may be reinstituted?

Gordon R. Kanofsky

Yes.

Dennis Forst - KeyBanc Capital Markets

Where is that $600,000 of impairment charge? Where was that from?

Thomas Steinbauer

For the most part it was in St. Charles.

Dennis Forst - KeyBanc Capital Markets

And that did not run through the St. Charles property or did it?

Thomas Steinbauer

No, it did not. It was at corporate.

Dennis Forst - KeyBanc Capital Markets

As well as the ballot initiative was all at corporate?

Thomas Steinbauer

Correct.

Dennis Forst - KeyBanc Capital Markets

And then lastly, the $45 million that you talked about management initiatives and the reduction of labor, marketing, etc., $45 million off of what base? Was that calendar '07 base?

Thomas Steinbauer

Yes, I mean, basically. Obviously we started these reductions in the middle of '08, but for analysts purposes, since what you have available to you - well, you do have by quarter. If you did a physical period ending June 30 '08, that might be a good expense base to compare that $45 million reduction to.

Dennis Forst - KeyBanc Capital Markets

Okay, 12 months ended June '08, more or less.

Operator

Your next question comes from Joseph Greff - JPMorgan.

Joseph Greff - JPMorgan

A question for you on the promotional allowances in the quarter and a very good job at reducing costs. To what extent is it easier to get away with taking out those expenses in the Missouri markets in Council Bluffs and East Chicago given maybe the state of some of your competitors, particularly one large one that might have a lot of leverage and therefore maybe not a lot of capital to either invest in properties or to reinvest in marketing programs. To what extent is that benefiting you?

Gordon R. Kanofsky

I can't really speculate on that a whole lot. I think that we actually took efforts to control our promotional spending long before our competitors paid attention to it. And the market shares have been remarkably stable, so I'm certain how much of that is in play on that. I think there's a certain amount of business that is going to be dependent upon promotional spending, but, in an all things being equal situation, people will prefer the place where they have the best experience and at the best property, and I think that we see time and time again that that's Ameristar.

Right now everybody's being very careful with their spending. And what we had discovered earlier in 2008, which is why we curtailed some of the promotional spending, is that we could give people extra coupons to come in and spend, but they weren't digging into their own wallet and all we were getting back was our own money minus the gaming taxes that we had to turn over to the state. Promotional spending is something that we look at on a constant basis. We're obviously going to be driving as profitable a net revenue as we can in this environment. We just don't think it makes a lot of sense.

Maybe six months from now hopefully it'll make more sense to engage in a little more promotional spending and have that really drive revenues down to the bottom line.

Joseph Greff - JPMorgan

And then, Tom, project capital expenditure for the balance of the year. I know you gave guidance for the first quarter.

Thomas Steinbauer

Well, as we mentioned some time ago, we thought there would be around $90 million left on Black Hawk at 12/31/08, and we are still in that range of somewhere between, let's say, $82 - $83 million and about $90 million for this year to finish up Black Hawk. And that's really the only major project on the drawing board that we're spending money on right now.

Joseph Greff - JPMorgan

Okay, so by the fourth quarter you don't really have much in the way of project CapEx?

Thomas Steinbauer

Again, depending on the exact timing of the project opening, there'll be some trail off, so there will be expenditures in the fourth quarter, but not at the same level as the first three. There'll be retention and things like that to wrap up that project in the fourth quarter.

Operator

Your next question comes from Ryan Worst - Brean Murray, Carret & Co.

Ryan Worst - Brean Murray, Carret & Co.

In the other expense, Tom, you had an expense of $1.9 million. Could you just provide some details on that?

Thomas Steinbauer

I could if I remembered them off the top of my head.

Ryan Worst - Brean Murray, Carret & Co.

Was it severance?

Thomas Steinbauer

Oh, no. Severance is up above the line, affecting EBITDA. We can post it online, I guess, so everybody can have it because I don't remember it off the top of my head.

Ryan Worst - Brean Murray, Carret & Co.

Well, on the severance, is that mostly in corporate or was that in the property level as well?

Thomas Steinbauer

Oh, no, that was spread out over all of the properties over several quarters as we moved forward with our cost control initiatives during the year.

Gordon R. Kanofsky

And at corporate, too.

Thomas Steinbauer

But, yes, it was company wide.

Ryan Worst - Brean Murray, Carret & Co.

So it was in each of the property lines as well as corporate?

Gordon R. Kanofsky

Correct.

Thomas Steinbauer

Yes, correct. And above the EBITDA line.

Gordon R. Kanofsky

We'll get back to you on that $1.9 million.

Operator

Your next question comes from Justin Sebastiano - Morgan Joseph & Co., Inc.

Justin Sebastiano - Morgan Joseph & Co., Inc.

Based, I guess, on the stepdowns of the senior leverage ratio over the next two years, it appears that may be entering the sub debt market, costly as it may be, would remove the covenant compliance overhang whereas maybe seeing a covenant waiver would just, I guess, maybe push that overhang off. Could you kind of give me your thoughts on choosing one over the other?

Thomas Steinbauer

It's a cost issue. We're constantly measuring the high yield market, and we continually have a dialogue with the major contributors within our bank facility discussing the various option and the cost alternatives to the company so that we can make the most efficient decisions for the shareholders over time. So that's where we are right now. It's an ongoing process but, as we've said all along, we intend to resolve the issue so that we do not have a compliance issue with the covenants at any point in time.

Justin Sebastiano - Morgan Joseph & Co., Inc.

And so what rates are you seeing right now in the sub debt market?

Thomas Steinbauer

I think the rates I saw yesterday from one schedule - and they obviously change by the hour  is we tend to be benchmarked against several of our peers and their rates for sub debt that is due 2/14 or 2/16 yesterday was in the 15% to 16.5% to 17% range.

Justin Sebastiano - Morgan Joseph & Co., Inc.

And then you told us how much [inaudible] were going to be in Q1 or you expect to take in Q1. How about for the year? What do you expect your debt level to be?

Thomas Steinbauer

By year end it should be somewhat in the neighborhood of where it is, let's say, right now, which is in the neighborhood of $1.660 billion - $1.670 billion based on what we're doing right now related to capital and cash management.

Justin Sebastiano - Morgan Joseph & Co., Inc.

And East Chicago, were there any charges in the EBITDA number, forgetting the impairment number. Excluding that impairment charge, is there anything else that's affecting EBITDA there?

Thomas Steinbauer

Well, there's severance costs at that property related to the reduction of work force at that property.

Justin Sebastiano - Morgan Joseph & Co., Inc.

Would you say the severance was bigger there than elsewhere?

Gordon R. Kanofsky

Yes.

Thomas Steinbauer

Yes, a little bit.

Justin Sebastiano - Morgan Joseph & Co., Inc.

Okay, because when we back out that impairment charge, I mean, we're looking at about 13.6% EBITDA number and about $8.6 million, I come up with, which is pretty light. So if you're saying a lot of that is - severance is affecting that, then I guess that makes sense.

And lastly, I guess, on the Missouri properties, it seems like you guys have done a pretty good job keeping the promotions in line with the repeal of the loss limit, but are you going to start to maybe ramp those promotions to get more out of state high rollers, say, from the Chicago market?

Gordon R. Kanofsky

We certainly are going to market as effectively as we can throughout the Midwest and expand the reach of those properties. We will continue to control the promotional spending and do it wisely so that it's profitable, but we have, I think, what are truly resort destination properties in Missouri in both metropolitan areas in St. Louis and Kansas City. They're obviously two of the largest metropolitan areas in the Midwest and they have opportunities.

Illinois, with everything limited to 1,200 gaming positions and a very high rate of tax, we should be able to make some inroads into Illinois customers, particularly up in Chicago. But there's also a lot of depth in the local metropolises in Kansas City and St. Louis that we expect to get benefit from.

Justin Sebastiano - Morgan Joseph & Co., Inc.

Tom, for the diluted share count for the fourth quarter, what number should we use for that? Does it pretty much coincide with what you guys have been showing the last couple of quarters?

Thomas Steinbauer

It would have been just about 57.4 except, if we'd have been in a positive EPS perspective, it would have been slightly different than the 57.2 that's on here now.

Operator

Your next question comes from Steve Altebrando - Sidoti & Company.

Steve Altebrando - Sidoti & Company

Can you speak, I guess, quantify a bit what type of expectation you have in terms of the add on to LIBOR should you be amending the agreement?

Thomas Steinbauer

What kind of add on to LIBOR? I wouldn't want to guess. Look, you know, if you want a number from me, since our banks are probably listening, 25 basis points. I mean, I'm not going to project that.

It's got to be competitive with what it might cost us in the high yield market. We obviously have a great relationship with a number of banks and are proud of that. We've had long-term relationships with a number of them, and we think it would be better for them to benefit from any changes we make to the structure versus going to the high yield market but it's what's best for our shareholders.

And the answer to that $1.9 million question is deferred comp. One of the impacts of the journal entry related to our deferred comp hits the other expense line below EBITDA and, with the decline in the market last year, most of that $1.9 million is the impact to that line item in the fourth quarter. So it's a non-cash issue at this point in time.

Steve Altebrando - Sidoti & Company

Is pushing back spending on Black Hawk a possibility if the terms are too onerous?

Thomas Steinbauer

No. I mean, as you could see in the slide presentation, we are topped out. I think the building is completely enclosed and climate controlled and everything in another few weeks, the first or second week of March, and so it doesn't really make sense at this point in time to delay that. And with the change in the ballot and the change with the gaming regulations and the $100 bet limit now and the 24-hour gaming, having a hotel with that 24-hour gaming is a huge competitive advantage for that market.

Operator

(Operator Instructions) Your next question comes from John Grassano - Buckingham Research.

John Grassano - Buckingham Research

Just a couple of questions on promotional spending again. Is the 4Q rate - and it came down pretty good - is it a decent run rate for the first half of '09 or do you expect it to trend higher?

Thomas Steinbauer

Obviously, it produced positive results on the EBITDA line in real dollars and margin in the fourth quarter. I'm not going to say it's not a reasonable run rate, but again, we're going to continue to monitor each one of our markets, our properties in those markets, and be as efficient as we possibly can with that expense as we go forward and we see what happens with the economy and our competitors.

John Grassano - Buckingham Research

So it's a decent run rate, not exact though. Is that what you're saying.

Thomas Steinbauer

No, it's not exact. I don't think anything's exact in today's world.

John Grassano - Buckingham Research

And just a derivative of that, the numbers in Missouri for January were up pretty strong. Was there any sort of uptick in promotional spending there?

Thomas Steinbauer

No.

Gordon R. Kanofsky

There was some favorability from the calendar in January year-over-year, but our results in Missouri were not driven by promotional spending beyond what we've been doing at other properties, along with the ratchet down from Q3 to Q4.

John Grassano - Buckingham Research

And outside of Chicago, was the severance cost biggest in the Missouri properties for 4Q?

Thomas Steinbauer

It was at St. Charles.

John Grassano - Buckingham Research

Mostly at St. Charles?

Thomas Steinbauer

The lion's share and Missouri.

John Grassano - Buckingham Research

And there's no plans for additional severance costs in the first half or first quarter of '09?

Gordon R. Kanofsky

Look, as we said, we always are going to be looking at making our operations more efficient. That said, I don't think we see big opportunities at this point in time. But just like with promotional spending, we will watch all of our costs. We've made a big shift from full-time to part-time labor, which gives us a lot more flexibility in scheduling, so I think that that can take care of a lot of fluctuations and business volume that we see for the time being.

Operator

Your next question comes from Dennis Farrell - Wachovia.

Dennis Farrell - Wachovia

Just a question regarding the bank facility. I'm wondering is there any way that you could extend the maturity out of the credit facility in any way, one? And two, I was just wondering about potentially repurchasing, your ability to repurchase bank debt. I know the term loan has traded as low, as I think it $0.50 on the $1. I think that could improve your leverage ratio that way. If you could just address that, it'd be great.

Gordon R. Kanofsky

I think it's fair that we looked at all alternatives and consider them and monitor them on a daily basis to look at what's in the best interest for our shareholders. So we don't feel constrained by anything other than what might be legal restrictions or tax implications associated with any one measure, but we've got a good team of professionals, both inside the company and outside the company. And, as I said, we're working on it and we will execute something that we think is in the best interest of shareholders for the long term.

Thomas Steinbauer

And a comment on the pricing. To clear that up, we've obviously taken a look at that over the last six months as we've been told by various people our debt is trading substantially below par value. Quite frankly, that's a bid that doesn't exist. In the last seven or eight months, approximately $10 million of our term debt has traded at a deep discount obviously related to people who needed liquidity. There's not a real market for our debt at $0.50, $0.60, $0.70, $0.80 on the dollar. It doesn't exist out there because, if it did, we would obviously have taken advantage of it.

Dennis Farrell - Wachovia

And I guess lastly, we've seen this in some other companies, is that as their bank maturities get close, their auditors obviously want to see liquidity increased to potentially handle those maturities as they do come up. I was wondering what steps that you could potentially take to kind of bridge that gap or if your auditors are comfortable with extending in some way?

Gordon R. Kanofsky

As I've said, we're looking at all options and we'll be executing something that we think works for everybody, especially our shareholders.

Thomas Steinbauer

And, you know, we were in compliance with all of the covenants related to our debt facility at 12/31/08.

Gordon R. Kanofsky

We've got a strong balance sheet. I don't think that we're perceived to be a significant risk from anybody's perspective. Obviously, we have some issues as the senior leverage ratio ramps down based upon its original schedule put in place a couple of years ago, but we're managing it and I expect that we'll manage it very effectively.

Operator

Your next question comes from Dennis Forst - KeyBanc Capital Markets.

Dennis Forst - KeyBanc Capital Markets

I wanted to ask about market share. I think you alluded to Vicksburg's market share in the fourth quarter. Can you repeat that?

Thomas Steinbauer

Their market share declined to about 43% or 44% in the fourth quarter after the additional facility opened in the market. On a fair share basis they were still above 100%.

Dennis Forst - KeyBanc Capital Markets

And Black Hawk, what was approximately your market share there? Did that ramp up at all?

Thomas Steinbauer

No, it's still running in that 16% - 17% range.

Operator

There are no further questions at this time. I will now turn the floor back over to Mr. Kanofsky for any closing remarks.

Gordon R. Kanofsky

Thank you, Julianne. We really appreciate everybody's participation today. We're very pleased, as I said, with our results. To be able to drive an improvement in adjusted EBITDA margin and adjusted EBITDA with a decline in revenues, we think, is something that is very extraordinary and is a strong signal of the strength of the management teams at all the properties and at corporate and our focus on making the company as profitable as possible.

And we'll look forward to talking to everybody again in a couple of months after the first quarter's in the bag.

Thank you.

Operator

Thank you all for participating in today's conference call. You may now disconnect.

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Source: Ameristar Casinos, Inc. Q4 2008 Earnings Call Transcript
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