Las Vegas Sun

March 28, 2024

War could cause credit woes for Las Vegas casino industry

Concerns that casino profits will suffer from war in the Middle East and the struggling U.S. economy intensified Tuesday as a debt-rating agency warned that a prolonged war could threaten ratings for several Las Vegas casino companies.

An accounting firm also has reported signs of cancellations that began over the weekend and an analyst is questioning the wisdom of building new hotel towers while the tourism industry outlook is so unpredictable.

The Las Vegas and Paradise Island, Bahamas, gaming markets are most vulnerable to a lingering war because they rely heavily on air travel for their customers, according to a report issued by Standard & Poor's.

The outbreak of war last week has "likely been accompanied by a decrease in bookings for both business and leisure travel due to the uncertainty surrounding airline safety and potential retaliatory terrorist attacks," they said.

That means that operators of luxury casinos in Las Vegas such as MGM MIRAGE, Park Place Entertainment Corp., Mandalay Resort Group, The Venetian casino resort are most at risk for ratings downgrades, analysts said.

MGM MIRAGE, Park Place and Harrah's Entertainment Inc. are just above S&P's cutoff for "investment grade" bond ratings. Mandalay Resort Group, The Venetian, Boyd Gaming Corp. and Station Casinos Inc. have ratings that fall a notch lower into the "speculative grade" category, meaning that their bonds carry more risk for investors.

Hotel industry analysts regularly conduct room rate and cancellation spot checks to gauge business activity. But such measurements have become increasingly tricky to pinpoint and may even be deceptive because consumers are giving shorter notice when booking trips, experts say.

"We've never had a phenomenon quite like this," said Bjorn Hanson, a lodging and gaming industry specialist with PricewaterhouseCoopers. "We can't use the old formulas we used before."

With the backdrop of the Sept. 11 terrorist attacks and a still-sputtering economy, "we started this (war) with the existence of travel concerns that didn't exist with the Persian Gulf war," Hanson said.

Already brief booking windows are expected to shorten further as the war progresses, making forecasts even more difficult, he said.

A PricewaterhouseCoopers survey of hotel companies over the weekend has revealed a wide variance in cancellation rates that range from few to none at properties with large business conventions and as high as 20 to 40 percent in major international travel markets such as New York and San Francisco. Nationwide, cancellations are averaging about 3 percent.

Cancellation rates in Las Vegas aren't yet available as casinos have kept specifics closer to the vest than the traditional hotels, Hanson said. Still, Friday's seven-day forecast revealed measurable cancellations that began that day and appeared to peak on Monday, with "cancellations outpacing new reservations," he said.

Hanson said he is witnessing other quirks besides shorter booking windows.

In some cases, customers are cancelling reservations and then calling back and booking again, he said.

"People are saying, 'We don't want to fly right now, let's wait,"' he said. They reconsider because "there's not really anything happening that makes it unsafe right now. People are feeling the loss of the experience that they've planned."

Other customers are calling back because they are getting room discounts that didn't exist before, he said.

"Some (repeat bookings) may have nothing to do with the war. They may simply be price-driven."

Las Vegas casino giants say they are weathering the war and haven't seen any significant decline in business. They're also forging ahead with a slew of new construction projects that haven't been pushed aside. Caesars Palace opened its Colosseum theater Tuesday night for a crush of visitors to see "A New Day" with Celine Dion and is also considering adding a luxury hotel tower at the property.

Mandalay Resort Group has begun construction on a $225 million hotel tower that will add more than 1,100 suites to its Mandalay Bay resort by the end of the year. The Venetian also is under way with about 1,000 more rooms for a $225 million tower and new convention space expected by summer. And MGM MIRAGE expects to break ground in the fall on a $375 million tower at Bellagio with 925 rooms and convention space that would be complete by the end of 2004.

The projects won't do much to boost travel trends already sagging under the weight of a weak economy and war concerns, Goldman, Sachs & Co. gaming analyst Steven Kent wrote in a research note to investors last week.

"The gaming stocks have already suffered due to weak operating trends, but we are increasingly concerned that investors will be further disappointed by the weak returns and expense of these new room towers," Kent wrote. "We disagree with the view that these towers create a panacea for struggling properties. It will give management a false sense that focusing on a tower is a way to improve results."

The uncertain outlook comes amid growing alarm in the traditional hotel industry -- which took longer to recover from the plunge in travel after Sept. 11, 2001 and has felt the brunt of last week's cuts in airline service and company travel plans.

Monday, Starwood Hotels & Resorts Worldwide Inc. -- one of the world's largest hotel companies with brands including St. Regis, Sheraton and Westin -- said it would withdraw previously announced earnings estimates for the first quarter and full year 2003 because of new uncertainties.

The company "could not have anticipated the significant deterioration in business due to the elongated Iraq negotiations and the related geopolitical conditions that worsened over the quarter and culminated recently in armed conflict."

Still, some on Wall Street remain fairly bullish on the gaming industry, which has weathered the declines much better than counterparts at traditional hotels.

"Vegas is faring better than the rest of the lodging industry, at least at this stage," said Marc Falcone, an analyst at Deutsche Bank Securities. "Clearly, how the war unfolds will be a big determinant" in the future, he said.

The gaming and hotel sectors are traditionally viewed as separate sectors by Wall Street analysts.

But concern about one can seep into the other, said David Ehlers, chairman of Las Vegas Investment Advisors.

The investment company has liquidated holdings in gaming stocks over a variety of concerns that add up to a general feeling of uncertainty about where the economy is headed, Ehlers said.

"The price of oil and the insecurity of war tends to keep people at home more. They will go to locals casinos more than ever -- whether they are in Las Vegas or California," he said.

Some analysts say they aren't aware of any significant business cancellations, echoing what companies have reported over the past few days.

While call volume is down a bit, cancellations are occurring at a rate that's normal for this time of year, said Joe Greff, an analyst at Fulcrum Global Partners.

"We really haven't seen a dropoff in occupancy or room rates in the first six days of this war in Las Vegas," Greff said.

Casinos got a boost from last weekend's well-watched NCAA basketball tournament, as well as some spring break tourism and business events, he said. This Friday, an Elton John-Billy Joel concert at the MGM Grand also will feed demand, he said.

April is tougher to handicap because booking windows are narrowing and there is a relative lack of big conferences and conventions compared to last year, he said.

A survey of room rates for the week of April 14 revealed a 15 percent drop in room rates during the week and a 44 percent decline in weekend rates, Greff said. While the Iraq war and a relative lack of big conferences and conventions may be having an effect, April rates are "tougher to handicap" because of the shorter booking window, he said.

"Room rate surveys seem to be telling us less and less right now where rates are going."

Falcone agrees.

"While forward room rates don't look very favorable, the short booking window means we're not sure how much, beyond the first week of April, (rate estimates) really matter at this point."

As the war and economic concerns linger, analysts have become more selective about which gaming stocks hold the most promise.

Of the major gaming stocks, MGM MIRAGE and Harrah's have the most "buy" or "strong buy" recommendations from analysts.

Station Casinos Inc. -- the dominant operator of locals' casinos in Las Vegas -- also is favored by most analysts because it is less dependent on tourism than its Strip counterparts.

Banc of America Securities analyst J. Cogan on Monday cut first quarter profit estimates for Harrah's, Mandalay, Park Place, Station Casinos and riverboat operator Argosy Gaming Co. on concerns of inclement winter weather and an expected slowdown around the end of this month during the Iraq war.

Station Casinos, MGM MIRAGE and Mandalay still remain Cogan's top picks.

Station Casinos and International Game Technology -- another stock favored by most analysts for its growth potential -- were still subjected to downgrades this week.

Merrill Lynch gaming analyst David Anders downgraded IGT to "neutral" from "buy" on concerns that the Reno-based slot maker has already enjoyed a run-up in price and over volatility in equipment sales, among other concerns that aren't related to the Iraq war.

Credit Lyonnais analyst Bryan Maher downgraded Station Casinos to "hold" from "add" on similar concerns of price appreciation and because a potentially lucrative contract to manage a tribal casino near California is mostly priced into its shares. The deal's prospects could also be hurt by a political backlash in that state, Maher said.

"Also, should the Las Vegas Strip see softer trends during the current war with Iraq, Strip operators may need to scale back worker hours again or lay off additional employees, which could have a ripple effect on the Las Vegas locals' gaming market," he added.

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