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Debt downgrades hurt gaming

Aug 26, 2008 7:01 PM

by Ray Poirier | Cash begets cash. Or at least that’s the way it was with the major gaming companies throughout the years of expansion both in Nevada and throughout the country.

Casinos developed mountains of cash so when they went to the financial institutions for more money to add to their properties or to acquire other companies, getting the money was easy. The debt binge was accommodated, at least until a little more than a year ago.

With the country’s credit crunch that ended easy access to cash, the casino companies were forced to search for financial support throughout the world.

Then with a slowdown in the economy, the companies were hard pressed to service this debt with cash flow.

In recent weeks, there has been a flood of debt downgrades with the ratings companies moving most gaming debt into the so-called "junk" category. That added to the woes of junk bond investors who have lost more than 14% on casino bonds year-to-date.

So far, only three gamers have filed for bankruptcy protection. Tropicana Entertainment LLC, Greektown Casino in Detroit, and Illinois-based Legends Gaming have run to the courts for help. Others are expected to follow, probably sooner rather than later, according to analysts.

Also of concern are the companies that take on major debt to make an acquisition. Reportedly, Harrah’s Entertainment saw its debt level reach some $31 billion when it was acquired by private equity companies earlier this year.

In a recent advisory, Standard & Poor’s noted that MTR Gaming Corp. (MNTG), former owner of Binion’s Gambling Hall in downtown Las Vegas and operator of Mountaineer Park in West Virginia, will have to increase revenues by 60% during the final six months of this year to meet its debt payments.

According to another company, Trump Entertainment Resorts Inc. (TRMP) has 8.5% notes due in 2015 that are yielding 25.6% and it recently reported losing $29.8 million in the second quarter.

And, critical funding needs of Las Vegas Sands Corp. (LVS) caused the analysts at Bank of America Securities to downgrade the company’s stock to "sell" on Friday.

"In addition to the well-known capital raising process in Macau (seeking $5.25 billion), we believe the U.S. and Singapore also face funding needs that are larger than most investors currently realize," wrote Shawn Kelley of Bank of America.