Las Vegas Sun

March 28, 2024

Casino industry outlook stable for rest of the year

Weakened performance in the first quarter and a lagging economy makes it unlikely that major casino operators will meaningfully outperform 2002 operating results this year, a major debt rating agency reported Wednesday.

Intense competition, lower gaming volume, higher operating costs such as taxes and insurance as well as adverse weather contributed to year-over-year decreases in cash flow for casino operators in the first quarter, Standard & Poor's said in an industry report card.

Cash flow -- typically defined as earnings before interest, taxes, depreciation and amortization -- is a key indicator of casino performance. S&P uses ratios of debt to cash flow to determine how leveraged companies are -- an indicator of how well they can repay their debts.

Of the Las Vegas casino operators, only Harrah's Entertainment Inc., Park Place Entertainment Corp. and MGM MIRAGE have achieved investment-grade ratings as opposed to the "junk bond" rankings of their peers. Park Place and MGM MIRAGE are on a "negative" watch for a possible ratings downgrade, while the outlook at Harrah's is stable.

In Las Vegas, visitation remained healthy but the struggling economy has hurt the domestic high-roller business, S&P analysts said Wednesday.

Moreover, the effect on tourism of the Severe Acute Respiratory Syndrome virus from Asia is still uncertain, they said, as many Las Vegas operators including MGM MIRAGE, Park Place and the Venetian resort have experienced a decrease in overall visitation from that region.

Even so, the casino sector is expected to be a "relatively stable performer, with many markets experiencing flat to modest revenue growth," analysts said.

Analysts broke down their analysis by company as follows:

Harrah's Entertainment Inc.: The company's total debt was 3.7 times its cash flow for the year ended March 31 -- the lowest and best of the major casino operators, S&P analyst Michael Scerbo said. Recent investments, especially in Atlantic City, are expected to drive favorable performance in the near term, he said. "Harrah's is likely to participate in industry growth opportunities in the near term" without sacrificing its investment-grade rating, he said.

MGM MIRAGE: The company's total debt is 4.6 times its cash flow, which is weak for its investment-grade credit rating, analyst Craig Parmelee said. "Despite significant progress in reducing debt during the last three years, MGM MIRAGE needs to continue to make meaningful progress in strengthening its credit measures during the next several quarters to maintain its current ratings," Parmelee said. S&P expects the company to de-emphasize share repurchases and new growth opportunities in favor of debt reduction, he said.

Mandalay Resort Group: The company's total debt is 4.8 times cash flow, up from a leverage ratio of 4.6 at year-end. That leverage isn't expected to decrease materially from its current levels as Mandalay funds the construction of its new room tower at Mandalay Bay and continues to repurchase shares of its own stock, Scerbo said. The company's liquidity position is adequate and was enhanced with a $350 million convertible debt offering during the quarter, he said. "The level of share repurchases will continue to be a key rating concern going forward," he added.

Park Place Entertainment: The company repaid an additional $50 million in debt, increasing total debt reduction over the past five quarters to $450 million. The company's debt was 4.4 times cash flow for the year ended March 31. A commitment to debt reduction in the face of growth opportunities, expected difficult business conditions and the effect of Severe Acute Respiratory Syndrome are key factors affecting the company's debt rating in the near term, Scerbo said.

Las Vegas Sands Inc.: The parent company of The Venetian resort in Las Vegas is completing a room tower expansion and investing in a Macau casino, both of which are on time and within budget, Scerbo said. Operating performance is expected to improve further this year with the tower's debut next month, he said. "However, the level of improvement could be muted by the weak economy and the SARS impact on Asian business."

Boyd Gaming Corp.: The company's credit profile is "much improved" over the past five quarters, following a period of significant spending between 1999 and 2001, Scerbo said. The company's debt is about four times cash flow. It's luxury Borgata resort in Atlantic City, a joint venture with MGM MIRAGE, is expected to open within the next 45 days. "Given the company's diversification, the new tax increase in Illinois is not expected to materially alter the company's overall financial profile," he said.

Station Casinos Inc.: Reduced spending in the near term is expected to result in improved credit standing, Scerbo said. The company's debt leverage remains high for its bond rating, which already falls into "junk bond" status, he said.

Coast Casinos Inc.: S&P expects continued cash flow improvement in the near future due to finished expansion efforts at the Orleans and Gold Coast. Coast had only $11 million available as of mid-May under its $139.5 million revolving credit facility. "In an effort to obtain a liquidity cushion until the bank facility is either amended or replaced, Coast has a bank commitment to provide a $20 million bridge line of credit, which it will likely not need to draw upon and may extend upon maturity," analyst Peggy Hwan said.

Riviera Holdings Corp.: The company's debt leverage is high for its bond rating, with debt at more than six times cash flow, Hwan said. "While liquidity is adequate with $30 million in revolver availability and modest capital spending plans, the company is pursuing external opportunities in Missouri and new Mexico," she said. The company's "B+" debt rating is the lowest among the major Las Vegas casino operators.

Three slot makers also made the list. International Game Technology, Alliance Gaming Corp. and Mikohn Gaming Corp. all have stable debt ratings with S&P. IGT has an investment grade rating of "BBB-," Alliance has a non-investment grade, or "junk" rating, of "BB-" and Mikohn has a lower rating of "B-."

International Game Technology: S&P upgraded company debt ratings in February 2002. In January, IGT issued $575 million of zero coupon convertible notes, with $137 million of the proceeds used to repurchase stock. "Financial policy will continue to be a key determinant to further ratings movement," Hwan said.

Alliance Gaming Corp.: "Bally's is the company's core division and operating momentum is expected to continue to be positive during the immediate term," Hwan said. "However, the entrenched position of a much larger competitor, IGT, is expected to limit Bally's ability to gain market share." The company's liquidity remains adequate, with sufficient excess cash, nothing drawn on its $24 million revolver and no material debt maturities until 2006, she said.

Mikohn Gaming Corp.: The company was removed from S&P's "credit watch" list in January, where it was placed in August 2002 due to weakened operating results. Results have stabilized with a new management team and Mikohn will likely benefit from its expanded partnership with Aristocrat Technologies Inc. and from cost-cutting moves implemented this year, Hwan said.

Join the Discussion:

Check this out for a full explanation of our conversion to the LiveFyre commenting system and instructions on how to sign up for an account.

Full comments policy