Billions in Strip debt may be downgraded

David Strow

Thursday, Sept. 27, 2001 | 11:06 a.m.

Major credit agencies are considering downgrading big Las Vegas Strip hotel-casino operators, following a tourism slump triggered by terrorist attacks Sept. 11.

Both Standard & Poor's and Moody's Investors Service placed the credit ratings of MGM MIRAGE, Park Place Entertainment Corp. and Mandalay Resort Group on review for possible downgrade. S&P also placed Las Vegas Sands Inc., the Venetian's holding company, on CreditWatch negative, while Moody's is reviewing the ratings of Harrah's Entertainment Inc. for possible downgrade.

Another debt rater, Fitch, placed Mandalay, Park Place and Boyd Gaming Corp. on rating watch negative, citing "the dramatic decline in near-term operating results" of Strip casinos.

Ratings actions by the agencies could hit the casino companies on the balance sheet. When credit ratings are lowered, it can become more difficult for a company to obtain credit. When credit can be obtained, lower ratings usually mean higher interest rates.

The amount of debt that could be affected by the ratings is massive. Combined, MGM MIRAGE, Park Place and Mandalay Resort Group held $13.5 billion in debt on June 30 -- $5.6 billion for MGM MIRAGE, $5.3 billion for Park Place, and $2.6 billion for Mandalay. Harrah's holds $3 billion in debt, while the Venetian has $787 million in debt.

"Widespread rating changes are not necessarily a foregone conclusion as a result of these CreditWatch placements," S&P gaming analyst Craig Parmelee wrote. "CreditWatch listings will be resolved as sufficient information becomes available to more fully evaluate the longer-term credit implications of recent events."

Though play in Las Vegas appears to be returning to more normal levels, "there is a concern that there may be a further decline in the volume of play as the economy deteriorates further, and that the players' gaming budgets may reduce with falling consumer confidence," Moody's said.

Moody's and Standard & Poors said they believe Las Vegas operators will be hit harder than gaming companies in other markets, as they are more dependent on air travel to generate business.

"Companies that have greater exposure to destination markets are likely to feel the effect of the slowdown more deeply," Parmelee wrote. "Steps taken by companies to reduce discretionary capital spending and to reduce costs in an effort to preserve balance sheet strength will be viewed favorably."

Park Place and Mandalay have each delayed major expansion projects in Las Vegas in recent days. Park Place delayed the construction of a $475 million, 900-room hotel tower at Caesars Palace, while Mandalay called a temporary halt to the construction of a $235 million, 1.8 million-square-foot convention center at Mandalay Bay. And all three companies have been cutting their workforces, laying off thousands during the slowdown.

However, all three companies have authorization to repurchase their own stock -- something companies often do during downturns in share price. The three companies all reached 52-week lows during a protracted sell-off last week, losing between 36 percent and 39 percent of their values during the period.

While that may benefit stockholders, it is something Moody's says it doesn't want to see, as it increases a company's debt leverage.

"The extent to which companies buy back stock and future financial policy will be an important factor in the review process," Moody's said.

Moody's and S&P took different approaches with Harrah's, which has only two of its 25 casinos in Las Vegas. Moody's placed it under review for downgrade, while S&P changed its outlook from "negative" to "stable."

Moody's didn't specifically say why Harrah's was placed on negative review. But S&P said its more optimistic outlook "reflects the fact that Harrah's is less reliant on destination markets than are other major operators and has more modest balance-sheet debt leverage."