Approximately CAD615 million rated debt affected

New York, July 30, 2012 -- Moody's Investors Service today downgraded Gateway Casinos & Entertainment Limited. ("Gateway")'s Corporate Family ("CFR") and Probability of Default ratings to B2 from B1 and the rating on the company's CAD170 million second lien notes due 2017 to Caa1 from B3. At the same time, Moody's affirmed the Ba3 rating on the senior secured first lien credit facilities, subject to review of final documentation. The rating outlook is stable.

The company plans to increase its existing term loan A facility by CAD50 million and the amount of its revolving credit facility commitment to CAD45 million from CAD35 million. The incremental borrowings on the term loan and revolver combined with cash on hand will be used to pay a one-time distribution of approximately CAD75 million to Gateway's shareholders, subject to senior lenders' approval through an amendment process.

The rating downgrade reflects the increase in Gateway's financial leverage pro forma for the dividend recap to just below 6.0 times debt/EBITDA from the low 5.0 times, at a time when improvement in future earnings performance remains uncertain, particularly from the three main casinos located in the Great Vancouver area, which combined generate approximately 70% of the company's overall property EBITDA. These casinos have experienced a downward trend in earnings in the recent past largely due to margin deterioration from higher operating costs and volatile table holds at certain casinos.

The proposed amendment and dividend also weaken Gateway's liquidity profile. The dividend will absorb a portion of the company's cash balance. In Moody's view, Gateway needs to not only stabilize but also to improve its EBITDA continuously in the coming year in order to: 1) meet the aggressive term loan amortization schedule of about CAD40 million per annum as contemplated by the proposed amendment, 2) maintain adequate cushion for compliance with continually tightening financial covenants as proposed, and 3) fund potentially significant capital requirements to support the new large development project in South Surrey, B.C. While Moody's recognizes that the company has some flexibility to manage its capital spending, delaying the new development project would constrain EBITDA growth.

The rating action is as follows:

Ratings lowered:

Corporate Family Rating to B2 from B1

Probability of Default Rating to B2 from B1

CAD170 million second lien notes due 2017 to Caa1(LGD5, 85%) from B3 (LGD5, 82%)

Ratings affirmed and LGD assessments revised:

CAD45 million first lien revolver expiring 2015 to Ba3 (LGD 3, 32%) from Ba3 (LGD2, 29%)

CAD200 million first lien term loan A due 2015 to Ba3 (LGD 3, 32%) from Ba3 (LGD2, 29%)

CAD200 million year first lien term loan B due 2016 to Ba3 (LGD 3, 32%) from Ba3 (LGD2, 29%)

RATING RATIONALE

The B2 CFR considers the risks associated with Gateway's small size, limited diversification, and high leverage. The ratings also recognize that approximately 70% of its property-level EBITDA currently comes from the three casinos located in Greater Vancouver area. In addition, the B2 CFR reflects Moody's view that the tepid organic gaming revenue growth in Gateway's primary markets in British Columbia and ever-intensifying competition among existing gaming operators to maintain or increase market share through higher marketing spending, could result in sustained margin erosion in the foreseeable future. These factors could also increase the execution risks at the South Surrey project that are typical for a ground-up new development project, such as potential project delays and cost overruns during construction, uncertain demand and possibly higher than expected opening and operating costs.

Positive rating consideration is given to the favorable regulatory environment, including substantial barriers to entry that exist in the Canadian gaming market -- currently there is no plan to issue new gaming licenses in British Columbia and Alberta -- and the company's eligibility for capital spending reimbursement programs in British Columbia. Moody's also recognizes Gateway's significant market position in B.C. in terms of total gaming revenue and market share.

The stable outlook incorporates Moody's expectation that the company will still likely generate positive excess cash flow (before growth capex) despite earnings pressure, and continue to pay down debt. It also anticipates that Gateway will continue to benefit from the current moratorium on new gaming licenses in British Columbia. At the same time, the stable rating outlook acknowledges the aggressive term loan amortization schedule and tightening financial covenants as proposed that could become difficult to meet if Gateway's EBITDA does not improve.

Ratings could be lowered if it appears that Gateway's debt/EBITDA will rise above 6.5 times and/or the benefits associated with the moratorium on new gaming licenses in British Columbia and/or capital recovery program are no longer in effect. Additionally, ratings could be also lowered if liquidity deteriorates including persistent negative free cash flow or covenant violations.

Ratings could be upgraded if it appears that Gateway is able to reverse the downward earnings trend at its main casinos and achieve/sustain debt/EBITDA around 5.0 times (including capital expenditure recoveries). Also required for a rating upgrade would be the continuation of the high barriers to entry and capital recovery program that already exist, more visibility on the company's ability to execute new development projects successfully, and the company's maintenance of a sound liquidity profile.

The principal methodologies used in rating Gateway were Global Gaming rating methodology published in December 2009, and Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Gateway Casinos and Entertainment Limited manages casino properties throughout Canada including three casinos and three community gaming centers in the Greater Vancouver Regional District, four casinos in Thompson-Okanagan region of British Columbia, and two casinos in Edmonton, Alberta. Gateway emerged from a recapitalization on September 16, 2010 pursuant to a Plan of Arrangement. The company is principally owned by the funds managed by The Catalyst Capital Group Inc. and Tennenbaum Capital Partners. Combined, Catalyst and Tennenbaum own approximately 85% of Gateway. Gateway has consolidated annual revenues of approximately CAD258 million.

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John Zhao, CFA Asst Vice President - Analyst Corporate Finance Group Moody'sInvestors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653Alexandra S. Parker MD - Corporate Finance Corporate Finance Group JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653 Releasing Office: Moody's Investors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653(C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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