Moody’s: Gaming outlook is stable

Tuesday, Nov. 11, 2003 | 10:30 a.m.

The debt rating outlook for the gaming industry remains stable despite a weak economy and increased operating expenses, while casino revenue is expected to rebound over the next 12 months from the sluggish economy, the war in Iraq and higher gaming taxes, a major rating agency said Monday.

The report, issued by Moody's Investor Services, said the agency didn't anticipate a significant number of rating upgrades or downgrades over the next year.

The outlook coincides with recent earnings reports from Las Vegas Strip companies and analyst reports indicating that the Las Vegas market is benefiting from rising room rates and improved spending activity.

Moody's disagrees with some analysts' expectations that major acquisition activity is on the horizon. The industry is maturing, leaving fewer opportunities for growth beyond major buyouts, analysts have said. Moody's said acquisition activity will be "modest" but that sales of individual assets as opposed to whole companies will likely be more prevalent than in years past.

"Consolidation will continue at a slow pace and will be concentrated among high yield issuers since large cap operators are either constrained by various regulatory ownership restrictions, digesting acquisitions or pursuing internal growth opportunities," Moody's analyst Peggy Holloway said.

Several operators have started to sell marginal assets, including MGM MIRAGE's announced sale of its Golden Nugget casinos in Southern Nevada and Harrah's Entertainment Inc.'s sale of a casino in Vicksburg, Miss., Holloway said.

Such transactions are likely to have a neutral effect on ratings because debt repayment should offset lost cash flow for sellers, she said.

Consolidation activity among casino operators remains below historic levels, with Penn National Gaming Inc.'s acquisition of Hollywood Casino Corp. in 2002 and Harrah's planned purchase of Horseshoe Gaming Holding Corp. so far this year. That compares with four deals in 2001.

Moody's also predicts that several new room towers under development or recently built in Las Vegas -- including those at the Venetian, Mandalay Bay, Bellagio and Caesars Palace resorts -- will spur market growth.

Returns won't likely exceed 10 to 15 percent given the number of new rooms opening within a relatively short time span, however, Holloway said.

While companies say the towers will help them meet demand for high-end rooms, some analysts had previously expressed doubts that the towers will be able to yield acceptable rates of return.

The stable outlook on the gaming industry reflects its resilience to the Sept. 11 terrorist attacks, the war in Iraq and a sputtering economy and as well as stable supply and demand characteristics in most regions, Holloway said. The agency believes that the casino industry is "somewhat less cyclical than other industries that rely on the discretionary spending habits of consumers as wagering has become a regular form of entertainment."

However, revenue and earnings growth are likely to remain sluggish over the next 12 months, while cash flow -- a key indicator of casino performance -- may remain relatively flat due to cost pressures, Holloway said.

While Las Vegas will continue to recover at a "moderate" pace over the next 12 months, gaming revenue through the past year remains below peak levels achieved in 2000, she said.

Room rates have started to rise, indicating stronger demand that "should allow operators to book higher margin business," Holloway said. Still, Las Vegas casinos "may continue to experience some margin pressure due to higher labor and insurance costs as well as the recently enacted increase in state gaming taxes that will moderate the flow through of expected higher revenue growth," she said.

The Wynn Las Vegas megaresort, expected in mid-2005, may become a catalyst to usher in a period of above-average growth on the Strip, she said.