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August 29, 2014

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Gaming stocks: Is spring in the air?

Wall Street credit analysts are out with more reports on the gaming industry and one has a decidedly "good news/bad news tone."

CreditSights analysts Chris Snow and Frank Lee issued a report noting "spring is in the air" -- a reference to investors warming up to gaming securities as optimism builds about the broader economy.

"However, tangible data points in the gaming sector have yet to emerge" to support the newfound optimism, they said.

"What is tangible at this point is that revenue in the major national gaming markets continues to accelerate downward, and unemployment rates in those regions continue to rise upward," the CreditSights report said.

But with spring in the air, CreditSights noted "optimism can create opportunity" in the form of higher stock prices that can lead to opportunities to improve liquidity by issuing more equity.

"Market capitalizations for bellwether names, such as Las Vegas Sands and MGM Mirage, could arguably have room for equity offerings, at least more so than when market caps were below $1 billion," CreditSights said.

Despite this bit of optimism, the bottom line for the CreditSights analysts is: "We have not yet embraced the optimism that has taken at least a token hold on the gaming sector. We believe this confidence is premature and we continue to maintain our underweight credit recommendation on the sector."

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Also out with a report is Moody's Investors Service, which Monday released its analysis of Harrah's newly concluded debt-exchange deal.

Moody's says the swap of new notes and cash for old notes resulted in a net debt reduction of about $1.8 billion. Other analysts have pegged the number at about $1.9 billion.

Either way, the analysts agree the exchange didn't change this reality: Given Harrah's hefty debt obligations and the economic slowdown that has reduced cash flow needed to make the debt payments, Harrah's is likely still headed toward some type of debt restructuring.

Harrah's Entertainment's "capital structure is unsustainable unless gaming demand rebounds significantly," said Moody's Senior Analyst Peggy Holloway.

Moody's confirmed Harrah's Entertainment Inc.'s corporate family rating at Caa3, upgraded its probability of default rating and downgraded its speculative grade liquidity rating.

The exchange resulted in a swap of junior debt at a discount for new second-lien notes.

"Moody's views the exchange as a distressed exchange for the particular securities involved, and reflects that a limited default has occurred'' through the assignment of a specific probability of default rating.

"The exchange transaction resulted in a modest improvement in leverage and interest coverage. Additionally, Harrah's Entertainment's liquidity profile improved modestly due to a reduction in interest expense and required debt amortization in 2010," Moody's said.

"Despite the modest improvement in Harrah's Entertainment's credit profile, the company's ratings were confirmed because credit metrics remain very weak, and the probability remains high that another default or distressed exchange could occur over the next two years,'' Moody's said. "Moody's believes that gaming demand will continue to drop in 2009 given reported declines in gaming revenue in many gaming markets. Therefore, Harrah's Entertainment's earnings are expected to decline again in 2009."

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