Analysis: Odds stack up against casino operators

Los Angeles (Reuters) – Casino operators, many loaded with debt piled on when credit was easy, are offering bargains to lure gamblers, but the odds for more bankruptcies are rising in the industry as fewer people try their luck.

Trump Entertainment Resorts Inc last week filed for its third trip to bankruptcy court as business at its three Atlantic City casinos continues to sour.

On Monday, Boyd Gaming Corp offered to buy most of the assets of Station Casinos Inc after the company said it was considering filing for bankruptcy.

„Casinos are facing unprecedented declines in performance,“ said Phillip Kleweno, an expert in corporate restructuring and a partner at Bain & Co’s corporate renewal group.

„Coupled with that, since the last downturn in 2001/2002 capital expenditures as a percentage of revenue have gone from the low teens to high 20s-low 30s.“

That building boom has left some operators with so much debt that they they are in danger of defaulting as consumers stung by a sharp drop in retirement portfolios and home values curb their betting habits, especially in destination markets like Las Vegas, Nevada and Atlantic City, New Jersey.

The take from gamblers on the Las Vegas Strip fell 23 percent in December compared with a year earlier. Atlantic City’s gambling revenue fell more than 9 percent in January.

Shares of companies like MGM Mirage and Las Vegas Sands are down more than 90 percent in the last year.

„Every single casino, even the strongest casinos, are trading at distressed levels now,“ said Kim Noland, high-yield analyst at bond research firm Gimme Credit.

Some bonds issued by Harrah’s Entertainment Inc are trading at just a few cents on the dollar.

Credit Drawn Down

Harrah’s recently drew down the remaining USD 740 million on its secured revolving line of credit, arousing speculation that the world’s largest casino operator may be close to violating debt restrictions. Harrah’s declined to comment.

Both Harrah’s and Station Casinos were acquired by private equity firms in leveraged buyout deals — Harrah’s in 2008 for USD 31 billion by Apollo Global Management and TPG Capital LP and Station in a USD 5.4 billion 2007 deal with its management and Colony Capital.

„Their future is more precarious and tenuous than those companies who haven’t taken on as much debt,“ said Kleweno.

Others with relatively high debt loads include MGM, developer of the Strip’s massive CityCenter project, and Las Vegas Sands. Both have had to scramble — by trimming capital spending, selling assets or issuing new equity — to avoid triggering debt covenants.

„No one in this market wants to go through a foreclosure,“ said John Kempf, a credit analyst covering the consumer sector at Barclays. But he and others said banks will be amenable to loosening covenant restrictions only if the companies can come up with viable credit plans.

Compounding the problems for Las Vegas and Atlantic City casinos is the sudden rush of meeting cancellations following a public outcry over wasteful spending by banks and other recipients of bailout funds.

„You can’t take a trip to Las Vegas or down to the Super Bowl on the taxpayers‘ dime,“ President Barack Obama famously said earlier this month.

Wynn Resorts Ltd recently had a corporate client pay a USD 3.3 million fee to cancel USD 5 million worth of business, CEO Steve Wynn said during a conference call on Tuesday.

Wynn has a comparatively sound balance sheet, having repurchased USD 625 million in loan principal during the fourth quarter and ending the year with USD 1.1 billion in cash on hand.

But the loss of lucrative mid-week corporate customers has forced casino operators to seek more tourist business. „It changes the whole profitability structure,“ Kempf said.

Bain’s Kleweno said casino operators „might need to rethink what makes a high-roller“ and expand their marketing range.

A hotel room may have a fixed nightly cost of USD 30 to USD 40, so „if you can get someone to pay a little bit more than that, you are ahead of the game,“ the consultant said.

Still, the economic uncertainty and sheer breadth and depth of the current downturn have made it difficult to bet on which companies will be able to survive.

„Even the companies that might have squeaked through are going to get whacked,“ Noland said.