More defaults ahead for debt-heavy casinos

Feb 3, 2009 5:10 PM
by David Stratton |

Recession, credit woes to continue

Fitch Ratings reported last week that total U.S. commercial and racetrack casino revenues in 2008 declined 3.5 percent, which, coupled with heavy debt loads and a difficult credit market, caused a record number of defaults by gaming operators.

Last year, seven operators defaulted on more than $13 billion in principal debt, with Station Casinos on the cusp of defaulting on an additional $2.3 billion after it was unable to consummate a debt exchange offer in December.

A "default," according to New York-based Fitch Ratings, a financial reporting service, is when a company misses an interest or principal payment, files for bankruptcy protection, or negotiates a reduction in its debt payments while under duress.

The latter is called a "distressed debt exchange," and it’s what Harrah’s Entertainment did when it negotiated a reduction of nearly $1.2 billion in its debt balance on Dec. 24.

French Lick Resorts in Indiana also had a distressed debt exchange in 2008. There were also two bankruptcy filings last year – Tropicana Entertainment and Greektown Holdings – as well as three missed payments – Herbst Gaming, Majestic Star and Trump Entertainment Resorts.

Based on a recession that is expected to continue through 2009 and a tight credit market, Fitch is predicting additional defaults and/or pressured transactions (such as the sale of assets) over the next 12 to 24 months.

"MGM Mirage and Ameristar Casinos are other issuers with notable refinancing risk that will become more concerning as 2009 progresses," Fitch states in its report, Tough Odds to Continue for Gaming, adding that, "Although MGM has recently enhanced its liquidity profile with a secured note issuance and an announced asset sale (Treasure Island)."

As noted, overall commercial casino and racino revenues declined 3.5 percent to roughly $36.2 billion in 2008. The drop-off was greater in the destination markets of Atlantic City and Las Vegas, where revenues were down about 7.6 percent and 8 percent, respectively (Las Vegas revenues based on December estimates).

The U.S. decline would have been worse if not for the ramp up of newer markets such as Pennsylvania and New York.

Fitch is predicting equal or greater declines for 2009.

All major sectors of the gaming industry – destination resorts, regional casinos, Native American gaming, credit markets and regulatory changes – are expected to be impacted by the recession, though regional and Native American casinos should fare slightly better than destination resorts in Las Vegas and Atlantic City.

The only segments of the gaming industry forecasted for improvement are equipment manufacturers and suppliers, which have received a "stable to positive" outlook from Fitch.

Fitch assigned the positive outlook rating to equipment manufacturers and suppliers, based on new casino openings over the next 18 months, the need to replace older slot floors and Bally Technologies’ strong market share since its operating turnaround.

In December Fitch forecasted the continuing decline in gaming revenues, based on higher unemployment in 2009, a sharp drop in consumer spending and weak capital markets.

As a result, virtually all sectors of the gaming industry will feel the pinch. Here is a summary of the economic effects on the major gaming industry sectors:

• Regulatory environment: Economic turmoil has already contributed to Kansas losing bidders for its four state-owned casinos. The state is now likely to ease licensing requirements as it reopens the bidding.

Budget-strapped states often turn to gaming when looking for new taxes to fill their coffers. There has already been some discussions about tapping gaming from legislators in states such as Kentucky, Massachusetts, Texas, New Hampshire, Nebraska and Ohio.

Other states that have recently legalized gambling, including New York, Maryland and Pennsylvania may find investment is dampened by their extremely high tax rates of 50 percent and higher.

• Commercial casinos: Fundamental outlook is negative. The weak fundamental trends, including fewer visits and less spending in casinos, coupled with high leverage and tight liquidity will continue to adversely impact U.S. casinos.

• Native American casinos: Fundamental outlook is negative. While Native American gaming operators are feeling similar pressure on weak operating trends, the operators in Fitch’s rated portfolio generally maintain more conservative financial profiles relative to rating levels, and will have more ability to withstand pressures from the recession in 2009.

• Equipment manufacturers and suppliers: Fundamental outlook is stable to positive. While the server-based gaming cycle has been slower than anticipated, many casinos are already in need of replacement outdated machines. Moreover, new openings such as Wynn’s Encore, MGM’s CityCenter, Fontainebleau and M Resort will create limited demand for new products.

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