ANALYSIS:

Gaming’s bond ratings reflect past, not future

Experts say recent downgrading is unlikely to have much effect

Mon, Jul 28, 2008 (2 a.m.)

A couple of weeks ago, major bond rating agencies downgraded credit issued by the major gaming companies, warning that the gambling business in Las Vegas is in trouble.

Though it made for dramatic headlines, experts say the actual effect of the ratings downgrades — which were based on old information rather than new developments — will likely be muted.

Gaming stocks and bonds had been badly pummeled by early evidence of the tourism slowdown and decisions by airlines to cut back on flights to Las Vegas.

When tourism was booming, casino companies were flying high on Wall Street. The bad news had a whipsaw effect and the stocks had further to fall than those of companies in less volatile industries.

The bond raters were being reactive. Their reports explained that the downgrades indicate much of the bad news had happened but that lower-than-expected May gaming revenue, released the week before by the state, triggered the lower ratings.

“I think they were waiting for more concrete data” to emerge before a downgrade, said Dennis Farrell, a bond analyst with Wachovia Capital Markets.

For investors who had reacted to the tourism slowdown, the moves by the ratings agencies were an expected, though delayed, reaction.

“It’s kind of pointless, like driving a car by mostly looking in the rear-view mirror,” said another Wall Street analyst, who asked not to be named. Analysts who work for investment banks have a different, and, they think, more sensible role in making predictions that investors can profit from.

Bond rating agencies have good reason to be conservative.

Lower bond ratings make it more expensive for companies to borrow money — a big deal for companies seeking to refinance or raise money for new projects.

The big rating groups — Standard & Poor’s, Moody’s and Fitch — have lately come under scrutiny by the Securities Exchange Commission for their role in the mortgage mess. Regulators think they didn’t cut their ratings for subprime mortgage investments fast enough and failed to warn that the real estate bubble was about to burst. In a report issued this month, the SEC said it found conflicts of interest in the process of rating the debt of companies. Bond rating agencies, which are paid by credit issuers, such as the gaming companies, for their ratings, gave the mortgages higher ratings than they deserved to not lose their business, the report found.

Lenders are leery of the gaming industry, though companies in many industries are finding it equally difficult to get financing.

The takeover of Harrah’s Entertainment Inc. by private equity firms in late January was the last of the major leveraged buyouts to close on Wall Street after lending dried up.

Though Harrah’s had locked in interest rates for its bonds, the banks that owned them had trouble finding buyers and sold the bonds at a discount to get them off their books. The fire sale cost the banks hundreds of millions of dollars and Harrah’s bonds are now trading at 75 cents to 85 cents on the dollar.

Gaming companies haven’t been doing much financing lately, anyway. Money had grown cost-prohibitive several months ago, as banks tightened lending amid the nation’s deepening mortgage crisis.

Gaming companies with projects under way had raised a lot of cheap money in the bull market. Those that didn’t secure their financing last year are probably frozen out, which means there might not be much development on the Strip for a few years after Boyd’s Echelon opens in 2011, Farrell said.

Investors, who react to future events rather than past ones, are focused on upcoming second quarter earnings reports and daily movements in fuel prices.

Discussion: 4 comments so far…

By neiman1

7/28/08 at 11:42 a.m.

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They slow down in tourism will continue and get much worse as long as fuel is so expensive. Drill, drill, drill, before we are all broke. $99 flights are now $250. This lowers the numbers all over town. Reject Reid and drill our resources now.
By rougie

7/28/08 at 2:35 p.m.

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Why not wait until we really need the oil first? There is no refinery capacity in this country to refine more crude. Do not say it was the treehuggers who have blocked building them the oil companies had no desire to build them
By SPFPAUNIONYES

7/29/08 at 6:15 a.m.

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MGM, Dubai Fall Behind on $3.5 Billion Loan for Las Vegas Plan

By Pierre Paulden and Jonathan Keehner

July 29 (Bloomberg) -- MGM Mirage and Dubai World are late in raising as much as $3.5 billion for their $11.2 billion CityCenter project in Las Vegas because banks saddled with debt to casinos and hotels are wary of making new loans.

Deutsche Bank AG and Credit Suisse Group, the Zurich-based bank that advised Dubai World last year when it invested $5.1 billion in MGM, are among the holdouts, bankers with knowledge of the matter said. Funding was supposed to be completed by the end of June, MGM Chief Financial Officer Daniel D'Arrigo told analysts in May. President James Murren said Frankfurt-based Deutsche Bank has been part of every MGM loan since 1998.

``No company in America is having an easy time doing bank deals right now,'' Murren said in an interview. ``There will be some banks that can't commit because they have a lot of exposure in the area or don't like the pricing.''

Deutsche Bank, the biggest German bank, hasn't yet made a decision on financing CityCenter, said spokesman John Gallagher in New York. ``We continue to evaluate the opportunity,'' he said. Duncan King, a New York-based spokesman for Credit Suisse, the second-largest Swiss bank, declined to comment.

``Wall Street firms are scrutinizing their extension of credit, particularly to the gaming industry, where the sentiment is pretty weak,'' said Michael Paladino, an analyst at Fitch Ratings in New York.

The amount of commercial and industrial loans from banks, plus short-term commercial paper, fell almost 3 percent during the past year to $3.27 trillion, according to data compiled by the Federal Reserve.

Norman Foster

Building the 76-acre ``city-within-a-city,'' designed by architects, including Norman Foster and Daniel Liebeskind, is costing Las Vegas-based MGM and Dubai about $100 million each per month, D'Arrigo said in May. MGM and Dubai World will raise at least $3 billion and may increase that to $3.5 billion to fund construction, MGM's Murren said on July 14.

Murren, 46, declined to comment on which banks have signed on for the deal or on its terms.

Bank of America Corp. is leading the fundraising and has commitments of as much as $2 billion from banks including UBS AG and Royal Bank of Scotland Plc, a banker involved in the deal said. Bank of America also is seeking financing from Middle Eastern and Asian banks, the banker said.

Louise Hennessy, a spokeswoman for Charlotte-based Bank of America, and UBS spokeswoman Rohini Pragasam declined to comment. Peter Ward, a spokesman for Edinburgh-based Royal Bank of Scotland, didn't return calls for comment. Officials at Dubai World, the investment company with $100 billion of assets that's owned by the emirate's government, didn't return calls.
By SPFPAUNIONYES

7/29/08 at 6:16 a.m.

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Las Vegas Market

``Some international banks are seizing this as an opportunity to become larger within our family relationships,'' Murren said.

New York-based Citigroup Inc., which has taken $54.6 billion of writedowns, and Barclays Plc of London have passed on the deal, said a banker involved in the fundraising. Citigroup spokeswoman Brooke Berard and Barclays spokesman Brandon Ashcraft declined to comment.

The Las Vegas casino industry has been struggling with revenue falling 16 percent in May, the fifth straight monthly decline, amid near-record gasoline prices and rising unemployment in the U.S., according to the Nevada Gaming Control Board.

Deutsche Bank took over the $3.5 billion Cosmopolitan Resort & Casino in January after developer Ian Bruce Eichner defaulted on a loan. The Cosmopolitan, due to be completed next year, is on the Las Vegas strip near the Tropicana Resort & Casino, whose parent filed for bankruptcy protection in May.

Harrah's Debt Tumbles

Deutsche Bank, Credit Suisse and Citigroup provided financing for the $27 billion takeover of Las Vegas-based Harrah's Entertainment Inc. by leveraged buyout firms Apollo Management LP in New York and TPG Inc. of Fort Worth, Texas, in January. Harrah's $1.4 billion of 10.75 percent notes due in 2018 have fallen to about 70 cents on the dollar to yield 17 percent since the start of the year.

CityCenter, located between the Bellagio and Monte Carlo casinos, is different from its highly leveraged competitors, Murren said. The project, which is scheduled to open in late 2009, relies mainly on equity capital as opposed to debt. Dubai and MGM can increase their contributions to CityCenter if financing costs climb, he said.

Increasing the equity contribution would leave less capital for future projects and could lower MGM's credit rating, said Peggy Holloway, a senior credit officer at Moody's Investors Service in New York. Moody's put MGM's debt under review for downgrade earlier this month, reflecting the need to complete the CityCenter financing and the ``challenging operating environment in Las Vegas.'' MGM is rated Ba2, the second-highest junk rating.

``There was some belief'' that Las Vegas was recession- resistant, Holloway said. ``Clearly, that hasn't been the case.''