Moody’s offers glum Vegas outlook

By Liz Benston

Thursday, June 12, 2008 | 12:02 p.m.

Some Las Vegas casino operators and analysts are hopeful that the economic downturn will bottom out by the end of the year and rebound again by the time several major hotels and condo towers are expected to open by late 2009.

Bond rating agency Moody's Investors Service has another outlook, which it released Wednesday in its most negative report yet on the Las Vegas Strip.

Moody's analysts say this downturn will have a more negative effect on earnings than the period following the Sept. 11 terrorist attacks and will dampen earnings for the next 12 to 18 months.

While that seems hard for many to believe (witness many fewer layoffs and the simple fact that travelers are still free to travel) Moody's offers an able argument, already hinted at by analysts and economists.

"Las Vegas largely sidestepped trouble by using price discounts to lure skittish travelers," the report said. "Now, with consumers' anxieties centered on their economic well-being, that strategy is unlikely to be as effective. Las Vegas operators are preparing for an extended period of weak demand will have to turn to other levers, such as reduced capital spending or less aggressive financial policies, to hold up through the next year or more."

Las Vegas weathered the consumer-led recession in 1990 and 1991, benefiting from the fact that regional casino markets weren't fully developed. After Sept. 11, consumer spending held up, boosted by rising home equity and the availability of credit. Las Vegas is more vulnerable today because of increased competition, higher interest rates for casino operators and more dependence on nongaming amenities, the report said. Nongaming amenities are viewed as more discretionary than gambling budgets (read: once a gambler, always a gambler) and are also more influenced by a decline in convention business.

Even before the downturn became official, casinos were cutting costs behind the scenes, including laying off workers and reducing workers' hours.

But the major resorts haven't gone so far as to trim spending on new attractions ­ a key strategy on the Strip, where new amenities drive additional demand.

Nor have they scaled back on share repurchase plans, as MGM Mirage and Wynn have spent millions of dollars in recent months to buy back shares they believe are undervalued.

Longer-term, Las Vegas will rebound, Moody's says. The question is when.

"In a nation where vacations are considered a virtual birthright, it seems inevitable that Las Vegas will remain high on the list of tourism hot spots," the report concludes.