New York (Reuters) – Prices of U.S. casino companies‘ bonds are collapsing, a sign more bankruptcies may be on the way as lenders take flight and high fuel prices curb travel to gambling resorts.
Investors have lost an estimated 14.2 percent on casino bonds year to date, the second-worst performance of any junk-rated sector after diversified media companies, which are down about 15.9 percent, according to a new report by JPMorgan.
„The expectation was that in a down economic cycle that gaming would still do well, but gaming is showing that it’s vulnerable,“ said Keith Foley, analyst for Moody’s Investors Service. „We believe it probably hasn’t hit its bottom.“
With credit drying up, at least three casino operators — Greektown Casino in Michigan, Kentucky’s Tropicana Entertainment LLC and Illinois-based Legends Gaming — already have filed for bankruptcy protection this year, and bonds of other major gaming companies are trading in „distressed“ territory, a red-alert level that suggests serious default risk.
Foley said smaller, single-property companies with big debt loads are most at risk.
Believing casinos were recession-resistant, bondholders and bankers poured money into the sector during a recent credit boom. Now, with the economy sputtering and gambling receipts down, casinos find themselves with dwindling revenue to support debt, and nervous lenders are backing away.
Financing in dire straights
Cash-strapped consumers are still gambling, but they are spending less at card tables or shifting to cheaper slot machines, according to Christopher Snow, analyst at independent research service CreditSights. Financing for casinos is also in dire straights, a concern for companies that depend on expansion to drive growth, he said.
„You see these balance sheets with a lot more debt at this point in the cycle than they had in prior cycles,“ Snow said. „Some (companies) are going to have to find new capital, and the market’s not receptive right now,“ he said.
Gaming companies have about USD 10.6 billion of loans maturing next year, debt that will have to be repaid or refinanced at a time when banks are tightening standards and charging more to lend, according to high-yield research publication Leverage World.
Recent leveraged buyouts appear to have happened at the worst possible time, according to JPMorgan. After taking on debt for LBOs and other purposes, some gaming companies have nine to 10 times more debt than earnings before interest, taxes, depreciation and amortization and are at risk of violating lending agreements. The ratio of debt-to-Ebitda, a widely followed measure of credit risk, is only one to two times at many investment-grade companies.
Harrah’s Entertainment, taken private in a USD 31 billion LBO earlier this year, is now grappling with a softer gaming market, higher debt and a pipeline of expansion projects that it needs to fund.
Trump Bond yields soar
„Certainly for companies like Harrah’s, it’s also a capital issue,“ said CreditSights‘ Snow. „They have a lot of money they’re going to spend, and with the operating environment the way it is, it’s tough to see how they’re going to be able to afford it all.“
Detroit’s Greektown Casino, in the midst of constructing a permanent casino, filed for bankruptcy protection in May after it breached lending agreements and failed to find additional equity, according to CreditSights.
Station Casinos, one of the most highly leveraged casinos, has some bonds yielding nearly 20 percentage points more than Treasuries, according to MarketAxess. Bonds are considered distressed when they yield 10 percentage points over Treasuries or more.
Trump Entertainment Resorts‘ (TRMP.O: Quote, Profile, Research) 8.5 pct notes due in 2015 are yielding 25.6 percent, or 21.64 percentage points over Treasuries, according to MarketAxess. The company, chaired by property mogul Donald Trump, reported a USD 29.8 million second quarter net loss earlier this month as revenue fell and it wrote down the value of a casino it is selling.
Even at current high yields, credit investors should „underweight“ the casino sector, which faces headwinds from a weakening economy, high leverage and competition from new properties opening on the Las Vegas strip, JPMorgan said in a recent report.
„We do not see any meaningful positive catalysts on the horizon,“ the bank said.