'Recession' taking a toll on casinos

March 25, 2008 6:00 PM
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By David Stratton | Although few casino operators use the "R" word when discussing the slowing economy’s effect on their business, a long-held belief that the gaming industry is recession-proof is finding little support these days.

Across the country, visitation to casinos is down, and the gamblers that do go to the casinos have put themselves on a budget.

Moreover, decreasing revenues have forced casino layoffs and cutbacks, and the credit crunch has put a damper on new and ongoing casino projects, forcing some operators to abandon plans or put them on hold.

"The results are suggesting, and a lot of companies are saying, that they believe the economy is having an impact on the amount of people coming (to the casinos) and the amount of money they are wagering," said Keith Foley, vice president and senior credit officer at the Moody’s Investors Service.

In a report it released to clients last Friday and obtained by GamingToday, Moody’s pointed to some dismal results in January. The Illinois gambling market was down a whopping 17 percent, Atlantic City fell 10 percent and Indiana 8 percent. Other markets with smaller declines included Nevada, Louisiana, Missouri and Iowa. The report is titled "Economic Slowdown Hits U.S. Gaming Sector."

Most casino officials agree with the findings, adding that they never believed the industry was immune to a recession.

"The industry is somewhat resilient to a recession," said MGM Mirage spokesman Alan Feldman. "But in no way, shape or form is it recession-proof."

Trump Entertainment Resorts Chief Executive Mark Juliano called the notion "an old wives’ tale."

"I never thought it was recession-proof," Juliano said. "After all, it is a consumer industry that relies on discretionary spending. There’s certainly no necessity required here."

Here are other conclusions drawn from the Moody’s report:

• The economic slowdown coupled with "fierce competition" in some markets will result in some operators spending more on promotion and capital investment.

• The shrinking capital and credit markets will likely result in the cancellation or delay of some development projects, potentially hurting long-term revenue and cash flow.

• Budget shortfalls in some states could result in higher gaming taxes in some jurisdictions.

• Some companies are more vulnerable now than ever before. That’s because the capital investment needed to compete successfully has increased substantially, and recent leveraged buyouts have put a drain on cash flow needed to service substantial debt loads.

• Despite the foreboding economic prognosis, the long-term fundamentals of the gaming industry "remain favorable," based on the increased acceptance and popularity of gaming and a demographic shift towards age groups that have shown a "high propensity to gamble."

Even before the report was released, Moody’s revised its outlook for the casino sector from stable to negative. Currently, the ratings agency has 11 casino companies under review for possible downgrade. That includes debt held by Trump Entertainment Resorts, which owns three Atlantic City casinos, the parent company of the Tropicana, and the two Connecticut casinos, Foxwoods and Mohegan Sun. Six companies already have a negative outlook.

Since the end of last year, Foley said, there have been 12 negative rating actions, four directly due to the weaker economy.

"Will gaming continue to slide as spring approaches?" Deutsche Bank analyst Andrew Zarnett asked in a recent report. "We believe the answer is a resounding YES."

In addition to a noticeable drop-off in casino revenue, several operators have been forced to alter development plans because of tighter lending practices.

"Now is one of the worst times to raise capital because lenders are willing to lend less, and the cost of capital is significantly more expensive than it was a year ago," gambling analyst Andrew of Zarnett of Deutsche Bank told the Press of Atlantic City. "For Atlantic City, it means delays."

Last month, Dan Lee, chief executive officer of Las Vegas-based Pinnacle Entertainment, announced that it was holding off on building a $1.5 billion gambling palace in Atlantic City.

"I’ve been asked, ‘How the hell are you going to build in Atlantic City?’" Lee said in a year-end earnings conference call on Feb. 26. "The answer is, if credit markets don’t improve, we won’t build. We’re not going to go broke building in Atlantic City."

A Pinnacle spokeswoman said last week that the company’s position had not changed.

Also in Atlantic City, three Trump casinos have been on the auction block for more than a year with no serious buyers.

"It’s very hard to finance jobs," acknowledged Donald J. Trump, chairman of Trump Entertainment Resorts Inc., which owns the Trump casinos. "If you couldn’t get financing in the past prior to the credit crunch, it’s almost impossible to get it now … whether you’re building or buying casinos."

The problem of financing new and existing casinos isn’t endemic to Atlantic City, according to industry experts.

"This is an issue impacting gaming and other developments around the country," Joe Weinert, senior vice president of Spectrum Gaming Group L.L.C. told the Press of Atlantic City. "Every gaming company considering a large-scale development at this time has to take into account the availability of affordable capital."

Notwithstanding the potential of a deeper recession, the Moody’s report suggests there’s a light at the end of the economic tunnel.

"The longer-term fundamentals of the U.S. gaming sector remain favorable," report author Foley said.

Among the favorable factors are the expected growth in gaming’s popularity, an increase in customers aged 45-65 years old, who have shown a higher propensity to gamble, and advances in gaming technology that will enable operators to better satisfy their customers’ changing tastes and spending patterns.