Las Vegas Sun

March 28, 2024

Analysts: Despite improvements on Strip, soft economy to linger

Las Vegas Strip hotel-casinos are likely to see business improve somewhat in the second half of 2010 and in 2011, but the recovery will be muted and operating trends will remain soft.

That's according to Fitch Ratings, which commented on the market Tuesday in a report focused on Strip giant MGM Resorts International.

Las Vegas Strip resorts have suffered during the recession by both a downturn in visitation to the city and growth in the number of hotel rooms thanks to the opening of CityCenter and other projects.

The Las Vegas Convention and Visitors Authority says nearly 3.2 million people visited the city in April, up nearly 1 percent from April 2009 but down from more than 3.3 million people in April 2007 when the economy was strong.

Citywide hotel occupancy stood at 84 percent in April of this year, down 4 percentage points from April 2009 thanks to a nearly 6 percent increase in the city's hotel room count to nearly 149,000 rooms.

Separately, U.S. consumer confidence, a key factor in driving visitation to Las Vegas, fell this month, the Conference Board reported Tuesday. That caused a sharp drop in stocks, including gaming stocks.

With Americans worried about jobs and the economic recovery, the board's Consumer Confidence Index dropped 9.8 points from May to 52.9.

"Consumer confidence, which had posted three consecutive monthly gains and appeared to be gaining some traction, retreated sharply in June. Increasing uncertainty and apprehension about the future state of the economy and labor market, no doubt a result of the recent slowdown in job growth, are the primary reasons for the sharp reversal in confidence. Until the pace of job growth picks up, consumer confidence is not likely to pick up," Lynn Franco, director of the Conference Board Consumer

Research Center, said in a statement.

Fitch, in its report on Tuesday, affirmed MGM's "issuer default rating" at CCC, saying the affirmation "reflects MGM's high sensitivity to an uninterrupted recovery in the Las Vegas market, heavy reliance on a favorable refinancing and capital markets environment, and a weak near-term free cash profile."

"These concerns are offset by enough current liquidity and additional sources of capital to meet debt obligations over roughly the next 15-18 months, as well as MGM's attractive asset portfolio, market position and demonstrated access to capital even in an unfavorable environment," Fitch said of MGM Resorts, which is carrying some $12.6 billion in long-term debt.

"Although Fitch expects Las Vegas Strip trends to improve in the second half of 2010 and 2011, its base case incorporates a muted recovery over the next 12-18 months. In Fitch's view, continued improvement in corporate/convention/group demand is a critical aspect of recovery for MGM's Las Vegas Strip performance since improved yields on midweek room demand will generate significant positive operating leverage," Fitch said in its report.

"With the expected opening of the 3,000-room Cosmopolitan in December 2010, Fitch believes supply growth will continue to pressure the market for the next 18 months, albeit at a decelerating pace," the report said.

Fitch said MGM Resorts has plenty of flexibility when it comes to attracting additional capital and raising cash. Cash can be raised by selling CityCenter condominiums and Fitch said potential capital infusions include $225 million to $450 million for its stake in the Borgata property in New Jersey and $300 million to $400 million from an initial public stock offering of its stake in the MGM Grand Macau casino in China.

Cash raised, though, may have to be spent on dealing with a lawsuit filed by CityCenter builder Perini Building Co. and on up to $300 million in CityCenter cost overruns, Fitch said.

Fitch analysts also noted uncertainties about whether regulators in Mississippi, Michigan and Illinois will reconsider the suitability of MGM's partner in Macau, Pansy Ho.

New Jersey regulators found her to be unsuitable because of alleged ties between organized crime and her father, Macau casino titan Stanley Ho. It was that finding that prompted MGM Resorts to put its 50 percent interest in the Borgata resort in Atlantic City up for sale.

It's highly unlikely Nevada regulators will reconsider her suitability, Fitch added.

MGM Resorts, then known as MGM Mirage, posted a loss for the first quarter as net revenue of $1.36 billion fell 4 percent from the first quarter of 2009. The company lost $96.7 million or 22 cents per share in the quarter.

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