2009: A year of crisis for the casino industry

Dec 30, 2008 5:10 PM

The recession and its effect on the gaming industry will continue to drive headlines in 2009, but that doesn’t suggest all hope is lost and casino operators’ only solution is jumping off the Stratosphere Tower.

It would also be a leap of faith to suggest a recovery is imminent and the good times will roll in the foreseeable future.

A more likely scenario is 2009 will be a year in crisis, with industry leaders struggling to determine whether the glass is half full or half empty, and what their proper course of action should be.

Remember that "crisis," based on its medical roots, means turning point – a fever continues to rise until it reaches a crisis point, at which the temperature either breaks or the patient succumbs.

Keeping in mind such a clinical prognosis, here’s an examination of what should happen over the next 12 months in the casino industry:

Slumping revenues

 

The recession will extend deep into 2009 as unemployment continues to rise and the Gross Domestic Product (GDP) takes its steepest decline since World War II.

The resulting drop in consumer confidence and shrinking discretionary spending will contribute to operating declines similar to those suffered in 2008.

The markets hardest hit will be the established gaming centers, Las Vegas and Atlantic City, while regional and tribal casinos will fare slightly better.

Casino marketing

 

The most prudent casino operators, especially of high-end properties on the Las Vegas Strip, will re-focus their marketing efforts toward middle-tier customers, who over the years seemed to have been "lost in the excess."

Translation: the luxurious, high-end image of some resorts hasn’t played well with the middle-income tourist.

In 2003, about one-tenth of Las Vegas visitors earned $100,000 or more a year; last year, about one-fourth did, according to the Las Vegas Convention & Visitors Authority. During that time span, people making less than $60,000 fell from about half to about a quarter.

In some ways, analysts said, the recession might have helped some resorts in re-thinking how they market to customers.

"We’re not going to be Dubai. We’re not going to charge $1,000 a night," said Kathy LaTour, an associate professor at UNLV, adding that high rollers "are never going to be 100 percent of the market. The fact is, there are people who come here who’ve been lost in the excess of the last few years."

Credit crunch

 

The frozen credit markets have already impacted new development and casino expansion, not only in the United States but overseas as well (Macau, for example). That trend will continue as lenders haven’t shown any signs of thawing any time soon.

A more dire consequence of the credit crunch is the availability of capital to meet debt obligations. Several high profile operators – Trump, Harrah’s and Station – are facing default on their debt obligations without a large infusion of cash or new credit instruments.

Without the ability to raise significant amounts of cash, several firms could face restructuring or even Chapter 11 bankruptcy over the next few months. Station Casinos and Herbst Gaming are two companies that are on the cusp of restructuring.

MGM MIRAGE (MGM), especially in the wake of its announced sale of Treasure Island and rumored sale of the Mirage resorts, appears positioned to meet its debt obligations in 2009, including the final financing piece to the CityCenter puzzle.

Harrah’s has been negotiating with bondholders regarding terms of distressed debt exchanges, but no results have been announced by the casino giant. If Harrah’s is unable to meet upcoming maturities, it may be a candidate for our next category – sale of assets.

Fire sales

 

We’ve already seen MGM MIRAGE use the sale of one of its mid-level Strip properties to raise needed capital. There may be more such sales on the horizon in 2009.

While none of the major operators has announced their holdings are being actively marketed, MGM’s action suggests viable cash offers won’t be discounted.

MGM and Harrah’s each have several casinos on the Las Vegas Strip and in other jurisdictions that might be attractive to up-and-coming operators.

Companies or operators that have the cash or credit on hand to make such purchases include Penn National Gaming, Jack Binion, Wynn Resorts and Boyd Gaming.

Boyd recently added $750 million to its balance sheet in the form of a mixed-securities shelf offering, which fueled speculation the company might be interested in acquiring a Strip property without incurring massive debt.

Gaming expansion

 

As cash-strapped states try to find ways to balance budgets without raising taxes, many will consider expanding gaming or even implementing it for the first time.

Last week, Kansas broke ground in Dodge City for its first state-owned casino; Illinois chose an operator for its 10th and final casino.

In Colorado, Cripple Creek became the first of the state’s three gambling centers to approve 24-hour gambling, and California approved a measure that would allow expansion of satellite wagering at 45 new locations such as card clubs, sports bars and theaters.

Over the next few months, Pennsylvania is expected to pursue legislation that would permit live table games at its slot parlors, and Florida may expand slots to race tracks in Miami-Dade, and pursue legislation that would allow blackjack tables at existing racinos.

Other states that are looking toward gambling expansion are New Hampshire and Maryland, while New York Governor David Paterson has stated he wants to see a major expansion of gambling in the state.

Slot makers

 

Equipment manufacturers, according to industry experts, are perceived as having the best chance of having a successful year.

Even though the recession has dramatically slowed casino expansion, it hasn’t halted it altogether. New properties are scheduled to open next year, including CityCenter, M Resort and Fontainebleau in Las Vegas, all of which will be equipped with the most modern gaming machines.

Moreover, a large percentage of casinos across the country are reaching the point where they need to refresh their slot floors, and the replacement cycle can’t be deferred for too long since the newest machines are light years ahead of many older models.

To underscore the point, Goldman Sachs last week upgraded gaming equipment makers to "attractive" and named Bally Technologies as its top stock, upgrading it to "buy."

Cocktails for too many

 

Finally, the National Restaurant Association is predicting several hot alcoholic beverage trends for casinos’ top dining rooms.

To accompany your gourmet meal, expect a variety of signature cocktails, organic wines and culinary cocktails in the months ahead.

If you haven’t tried one, a culinary cocktail is an emerging concept in which the "mixologist" uses a wider variety of ingredients and more precise techniques than simpler concoctions like the plain martini or Manhattan.

Often times, these creations are made with health and nutrition in mind, such as using fruits and full servings of vegetables.

Now that’s a trend worth watching – alcohol spiked with a dinner salad or a fruit tray.