Gaming industry comeback confirmed

By Liz Benston (contact)

Tuesday, June 4, 2002 | 11:10 a.m.

A prominent Wall Street debt-rating agency today raised its outlook for the gaming industry from negative to stable, reversing an industry downgrade that followed the terrorist attacks of Sept. 11.

Still, companies' individual debt ratings, which included many downgrades following the attacks, have not moved back up to pre-Sept. 11 levels, according to a report by Moody's Investors Service in New York.

"In a couple of those cases, (companies) were very much on the edge to begin with," said Moody's analyst and report author Peggy Holloway. "Of the companies that were downgraded, Sept. 11 did put them back enough" to warrant maintaining a lower debt rating, she said.

Moody's ratings aim to forecast performance over 18 to 24 months. "It's not likely ratings will go back up very quickly," she said.

Riverboat markets have essentially rebounded to normal, while markets such as Las Vegas that depend heavily on fly-in patrons also have made a comeback, although a slower one, the report said.

Gaming companies with both riverboat and Las Vegas casinos concurred with the findings.

Boyd Gaming's riverboat business surged back much faster than its Las Vegas properties following Sept. 11, company spokesman Rob Stillwell said.

The riverboat market has returned to normal, though Las Vegas is slightly off last year's returns, he said.

The company's Stardust casino on the Strip felt much of that impact, as did locals' properties that were hurt by the layoffs that followed the attacks, Stillwell said. But its downtown properties remain strong, he added, mainly due to popular travel packages for Hawaiians that include chartered plane flights from Hawaii and stays in downtown hotels.

Harrah's Entertainment Inc. responded to a dropoff in riverboat business by aggressively marketing to loyal customers -- a move that paid off with higher returns in the fourth quarter than the same period a year ago, said spokesman Gary Thompson.

Harrah's Las Vegas casinos were hurt by the decrease in air and ground traffic following the attacks but have since returned to normal, he said.

The Moody's outlook covered 41 gaming companies and $36.6 billion in outstanding debt. About 58 percent of these companies' debt issues fall in the Ba3 to B2 range, called non-investment grade, or "junk," for their higher degree of investment risk. Even larger companies such as MGM MIRAGE, Mandalay Resort Group and Park Place Entertainment Corp. fall on the cusp of non-investment-grade ratings. Slower potential earnings growth and the possibility that increases in development spending could preclude debt protection measures call for such "speculative grade" ratings, Moody's said.

The gaming industry is moving into a more mature phase in which companies are directing capital expenditures into existing properties to increase same-store sales, Holloway said. This spending has led to "solid returns on investment, particularly in the riverboat markets," she added.

The report followed a broad selloff in gaming stocks Monday in reaction to the passage of a gaming tax increase on riverboat casino operations by the Illinois Legislature. The bill has not yet been signed by the governor.

Gaming stocks fell again this morning. Park Place Entertainment Corp. traded down .3 percent, MGM MIRAGE was down 1.5 percent, Harrah's Entertainment Inc. was off 2.8 percent and Mandalay Resort Group was down 3.3 percent.