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Financial Instruments and Fair Value Measurements
 12 Months Ended
Dec. 31, 2019
Fair Value Disclosures [Abstract]  
Financial Instruments and Fair Value Measurements

Note 12 – Financial Instruments and Fair Value Measurements

Overview

Estimates of fair value for financial assets and liabilities are based on the framework established in the accounting guidance for fair value measurements. The framework defines fair value, provides guidance for measuring fair value and requires certain disclosures. The framework discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow) and the cost approach (cost to replace the service capacity of an asset or replacement cost). The framework utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:

 

•

Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.

 

•

Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

 

•

Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions.

Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. Thus, assets and liabilities categorized as Level 3 may be measured at fair value using inputs that are observable (Levels 1 and 2) and unobservable (Level 3). Management's assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of assets and liabilities and their placement within the fair value hierarchy levels.

Financial Instruments

The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, an Interest Rate Cap derivative and debt.

The carrying values of the Company’s cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the short duration of these financial instruments.

The following table summarizes the fair value measurement information about the Company’s long-term debt:

 

 

 

December 31, 2019

 

 

Carrying

 

 

Fair

 

 

Fair Value

(In thousands)

 

Amount

 

 

Value

 

 

Hierarchy

Term loan

 

$

772,000

 

 

$

776,806

 

 

Level 2

Senior Notes due 2026

 

 

375,000

 

 

 

401,250

 

 

Level 2

Finance lease liabilities

 

 

12,463

 

 

 

12,463

 

 

Level 3

Notes payable

 

 

6,369

 

 

 

6,369

 

 

Level 3

Total debt

 

$

1,165,832

 

 

$

1,196,888

 

 

 

 

 

 

December 31, 2018

 

 

Carrying

 

 

Fair

 

 

Fair Value

(In thousands)

 

Amount

 

 

Value

 

 

Hierarchy

Term loans

 

$

992,000

 

 

$

952,300

 

 

Level 2

Finance lease liabilities

 

 

7,127

 

 

 

7,127

 

 

Level 3

Notes payable

 

 

1,111

 

 

 

1,111

 

 

Level 3

Total debt

 

$

1,000,238

 

 

$

960,538

 

 

 

 

The estimated fair value of the Company’s term loan and 2026 Notes is based on a relative value analysis performed as of December 31, 2019 and 2018. The finance lease liabilities and notes payable debt are fixed-rate debt, are not traded and do not have observable market inputs, therefore, the fair value is estimated to be equal to the carrying value.

As of December 31, 2019, the Company’s Interest Rate Cap was outstanding with a notional amount of $650 million and an initial purchase price of $3.1 million, which expires on December 31, 2020. Using Level 2 inputs, the Company adjusts the carrying value of its Interest Rate Cap derivative to estimate fair value quarterly based upon observable market-based inputs that reflect the present values of the difference between estimated future fixed rate payments and future variable receipts. The fair value of the Company’s Interest Rate Cap asset at December 31, 2018 was $5.0 million and it had no value as of December 31, 2019. As the Company elected to not apply hedge accounting, the change in fair value of its Interest Rate Cap was recorded in the consolidated statement of operations.

Business Combinations and Long-lived Assets

In connection with business combinations, the Company recognizes assets acquired and liabilities assumed at estimated fair value and adjusts liabilities for contingent consideration to estimates of fair value quarterly. For the Laughlin Acquisition and the American Acquisition, these amounts were finalized during the fourth quarter of 2019 and the second quarter of 2018, respectively. All value metrics and estimates utilize Level 3 inputs.

 

Fair value estimates for land, land improvements, building and leasehold improvements, and other property and equipment are calculated with primary reliance on the cost approach, with secondary consideration being placed on the market/sales comparison approach. Significant inputs include consideration of highest and best use, replacement costs, sales comparisons (recent transactions of comparable properties), and market approaches (and the properties’ ability to generate future benefits).

Fair value estimates of intangible assets are based on a variety of methods as follows:

 

Trade names – Primary reliance for estimating fair value of trade names is typically placed on a relief-from-royalty method and includes an estimate for a reasonable royalty rate (0.75% to 1.0% in the Laughlin Acquisition and 0.25% to 1.0% in the American Acquisition) that give consideration to third-party license agreements to determine an implied royalty rate. Estimated after-tax cash flows are discounted to present value utilizing a range of discount rates from 11.0% to 14.5% depending on the trade name, which reflects the risk of the cash flows related to the asset and the risk and uncertainty of the cash flows for the trade name relative to the overall business. The trade names associated with the Laughlin Acquisition and the American Acquisition were given an indefinite life.

Player and customer relationships – The estimated fair value of player and customer relationships acquired typically relies on an excess earnings method under the income approach and/or a cost-to-replace approach. After-tax cash flow discount rates have varied from 11.0% to 14.0%. The player relationships associated with the Laughlin Acquisition and the American Acquisition were given a useful life of two years and three years, respectively.

Gaming and liquor licenses – Estimated fair value for gaming and liquor licenses is generally determined based on the cost approach. In performing the cost approach, management uses estimates for explicit and implicit costs to obtain the licenses. The economic life of the Company’s Nevada gaming licenses, Montana gaming license and various liquor licenses are anticipated to be indefinite, as they are easily maintained. The Company’s Maryland gaming license associated with Rocky Gap is subject to amortization as it has a finite life of 15 years.

Leasehold interest and in-place lease value – The leasehold interest acquired as part of the American Acquisition comprises third party rights to lease retail space within the casinos. The leasehold interest acquired as part of the American Acquisition was given a useful life 3 to 80 years and the in-place lease value was given a useful life of 3 to 4 years.

Non-compete agreements – The estimated fair value of non-compete agreements is generally based on the lost profits method under the income approach. It uses the difference between estimated future cash flows “With” and “Without” the non-compete agreements and probability factors associated with the assumptions. The non-compete agreements associated with the Laughlin Acquisition were given useful lives of five years.