Debt-laden Las Vegas Strip casino giants Caesars Entertainment Corp. and MGM Resorts International could be hurt more than competitors by continued weakness in the U.S. economy, Moody’s Investors Service reported today.
In a special report on concerns the U.S. economic recovery may be slowing, Caesars and MGM Resorts were named as being ``more reliant on continued economic improvements to grow out of the their high (debt) leverage than higher-rated companies are.’’
``While gaming companies took their lumps during the Great Recession and have largely put themselves back on track, they remain vulnerable to bumps in the U.S. economic recovery given their decimated balance sheets,’’ Moody’s said. ``If consumers cut their gambling budgets or casino trips, company earnings could be affected. This could result in (debt) downgrades of especially lower-rated companies that have been counting on a stronger economic recovery.’’
Moody’s noted the Federal Reserve last week reported that the economy was expanding less quickly than it predicted and unemployment may remain high longer than expected.
Companies facing near-term economic challenges because of this situation including Las Vegas-based Boyd Gaming Corp. and Pinnacle Entertainment Inc., Moody’s said.
They have "lowered their expenses and created a significant amount of breathing room in their covenants and debt maturity schedules,’’ Moody’s said.
"However, they are still highly leveraged and have company-specific, near-term risks that could be exacerbated if consumers decide to curb their gambling budgets,’’ Moody’s report said.
Companies with big Asian operations such as Las Vegas Sands Corp. and Wynn Resorts will fare best through this period, Moody’s said. It also named Penn National Gaming Inc., owner of the M Resort in Henderson, as being among the casino operators that has diversified into leading market positions.
"Although the Fed’s outlook on economic growth is still in line with that of Moody’s economists, this announcement is the latest in a steady stream of bad news that appears to be taking a toll on consumers. And it is happening just as consumers started to beef up their savings. We are concerned that consumers’ propensity to spend on gaming activities will not withstand another hit to their wallets, even a small one,’’ Moody’s said in its report.
"Low-rated companies are counting on a recovery Unfortunately, an extended period of consumer weariness—or any economic event that hurts consumer demand for gaming—could have a material negative effect on company earnings. It could also result in downgrades, particularly for the significant number of relatively lower-rated companies relying on an economic recovery to grow out of capital structure challenges,’’ Moody’s said.
As for MGM Resorts, with $12 billion in long-term debt, Moody’s said it faces "significant near-term debt maturities.’’
It’s highly leveraged with debt/annual EBITDA running at more than 11 times. EBITDA means earnings before interest, taxes, depreciation and amortization.
"Into 2012, we expect MGM Resorts to benefit from a rebound in group and convention business in Las Vegas (its largest market). Higher room and food and beverage revenue will help offset to some degree an expected sluggish gaming demand, resulting in modest earnings growth. However, earnings growth alone will not be enough to reduce leverage by any material degree,’’ Moody’s said.
At Caesars, with long-term debt of $18.6 billion and leverage at more than 12 times, Moody’s said it has no significant debt maturing until 2015.
"We expect Caesars’ earnings to improve as a result of continuing material cost reductions and lower promotional spending. Nevertheless, given Caesars’ weak credit profile, there is a possibility that the company could again pursue transactions that will result in impairment of debt-holder claims as a means to improve its capital structure if gaming demand fails to recovery materially,’’ Moody’s said.