Gaming industry seen as stable by S&P analyst

Friday, Oct. 3, 2003 | 11:21 a.m.

A major bond rating agency says it doesn't expect significant downside debt risk for the gaming industry given the sector's near-term stability.

About 80 percent of U.S. gaming industry debt rated by Standard & Poor's carries a "stable" outlook.

However, the demands of a capital-intensive sector and the likelihood of continued consolidation could still put companies at risk of ratings downgrades or other actions, S&P analyst Michael Scerbo said Thursday during a conference call with analysts.

Companies might increase debt to fund capital projects or acquisitions, he noted.

Credit downgrades are significant because they can increase the cost of borrowing funds, thus reducing company profits or making new investments more problematic.

In some cases, S&P may place debt on watch for a possible upgrade or downgrade. It also assigns a ratings outlook on a debt issue that reflects the potential direction of a credit rating over a longer term. A change in outlook may be caused by a shift in the economy or in fundamental business conditions but is not necessarily a precursor of a rating change or credit watch action, S&P says.

Credit downgrades of gaming companies this year have outnumbered upgrades by a ratio of 3 to 2, Scerbo said. Downgrades were the direct result of credit actions that weren't in line with the former ratings for an extended period, Scerbo said. Of the upgrades, one was the result of continued improvement in operating results and a solid balance sheet, while the other stemmed from improved asset liquidity.

Though outpaced by downgrades, the sector benefited from upgraded outlook revisions on debt issues, Scerbo said. The majority of outlook revisions involved issues that were raised to "stable" from "negative" or to "positive" from "stable."

Last month, following one of the biggest acquisition announcements in recent years -- Harrah's Entertainment Inc.'s $1.45 billion purchase of Midwest riverboat gambling operator Horseshoe Gaming Holding Corp. -- S&P said it may raise Horseshoe's credit ratings. The agency affirmed senior credit ratings for Harrah's.

The Las Vegas Strip market is expected to strengthen in the near term, while performance in the rest of the U.S. gaming industry also is anticipated to gradually improve over the next several quarters in line with the overall economy, he said.

Industry stability is characterized by gradual improvement of gaming performance over several quarters, further strengthening of the U.S. economy, continuation of "positive momentum" in Las Vegas, relatively stable performance in Atlantic City and riverboat gambling markets and continued growth in tribal gaming, he said.

Overall, the gaming industry has also outperformed other leisure industries, he added.