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Even major players feel serious squeeze as revenue drops, debts rise
Sunday, Oct. 19, 2008 | 2 a.m.
Casino companies’ earnings are plummeting by double digits. Debt costs are rising for many companies. And their customers are spending less.
In the financial world, in this economy, those are the trend lines of doom.
Indeed, a few smaller operators are already close to bankruptcy. But could giants like MGM Mirage and Harrah’s Entertainment be next?
The breathtaking series of Wall Street failures and Washington bailouts of recent months suggests anything is possible — even spectacular failures in Las Vegas.
For now, bankruptcy protection remains a remote, if grim, possibility for all but the most damaged companies. Experts say that banks will negotiate with the big casino operators rather than force them into bankruptcy.
“These companies are still generating a huge amount of cash. The banks are going to work with operators that are willing to cut back on capital expenditures,” said one banker, who requested anonymity.
Yet financial experts say for the casino giants to survive in this economy, they must continue to make smart, sometimes painful moves. They also need a little of that luck so many people come here to find.
Casino executives and analysts interviewed by the Las Vegas Sun last week were entirely aware of the industry’s plight as they explained the steps needed to shore up these companies.
The chief concern among casino operators remains how long the economic downturn will continue. The deeper and more prolonged the downturn, the more likely that companies will be forced into bankruptcy.
In the meantime, casino operators are pursuing options to cut costs and hold creditors at bay.
Harrah’s recently completed an inter-company loan of $200 million to trim the company’s debt. It’s now paying a portion of its interest by issuing additional bonds, saving the company millions of dollars in cash.
Station Casinos will seek some reprieve from its banks, though the company’s debt costs will likely go up, analysts say.
Both companies have relatively little cash left after interest payments to pay for upgrades to their properties.
Casino operators are also cutting costs where they can, including payroll, their single largest operating expense. At many companies, this has meant laying off managers and rank-and-file workers in recent months.
As of August, the state reported that the gaming industry employed roughly 600 fewer people than a year ago. Although more workers have lost their jobs in that time, these figures reflect that many people who lost jobs have since found work, especially at new casinos that are hiring or have opened.
Some companies have halted construction projects, and analysts expect more plans to be put on hold in the coming months. (The exceptions are big projects too far along to mothball, such as MGM Mirage’s CityCenter and the Octavius hotel tower at Harrah’s-owned Caesars Palace.)
Some executives are putting more cash, or equity, into their companies. Las Vegas Sands Chief Executive Sheldon Adelson, the company’s largest shareholder, recently lent the company $475 million of his own money to pay down debt.
Companies with wealthy shareholders could do the same, analysts say.
Still, some companies may not be able to wait out the economic downturn. Herbst Gaming and the owners of the Hooters hotel, for example, are not generating enough cash to cover debt payments.
A rebound by 2010 would be soon enough for companies to get a reprieve from lenders and weather the downturn, experts say.
Yet with gaming stocks and bonds trading at less than 50 percent of their value of a year ago, most investors aren’t hopeful for a quick turnaround.
Some experts believe there might be a cultural shift at play with longer-term implications for businesses, especially the Las Vegas resort industry, which encourages escapist, spendthrift behavior.
“Post the era of using homes as ‘piggy banks’ and overspending as a nation at every level, we believe a new era of national thrift is before us,” Andrew Zarnett, a bond analyst with Deutsche Bank, said in a research report last week. “We believe last week’s activities in the stock market have caused too much psychological damage and the general public has been traumatized by these events ... We believe Americans will be forced, if not at their own volition, to reduce household debt.”
The result, Zarnett says, will be reduced consumer spending and an unprecedented gaming industry recession.
For several casino companies, the economy began its slump soon after they took on massive debts. At the tail end of the credit boom, Station Casinos and Harrah’s went private with the help of private equity firms that borrowed extensively to make the deals happen.
Ideally, leveraged buyouts rely on cheap loans that are paid down by growing earnings over a longer term than is acceptable to Wall Street. The companies can then be sold back into the public market for more money.
It’s hard to blame these companies for taking on debt when they did because few business models would have assumed a decline this deep, according to one Las Vegas casino executive, who requested anonymity.
“Nobody considered a situation where your cash flow goes down by 25 percent because that would have been a ridiculous assumption to make a year ago,” the executive said. “You would have been laughed out of the room.”
Before the economic decline, major casino companies used cheap capital to build expensive properties and acquire others. Lenders gave them money at attractive interest rates on the assumption they would generate enough cash to pay off their ballooning debts, or at least refinance them at lower rates.
The credit crisis, by itself, wouldn’t have been too dire for casino companies. As long as casinos generate huge amounts of cash that grow over time, as well-run casinos have throughout history, even monster debts can be managed.
Operators have seen boom-and-bust cycles before, and the Strip has historically functioned with some independence from the broader U.S. economy.
Yet in this downturn consumers of all income levels are spending less, contributing to double-digit earnings declines at some casino companies. Those factors have shifted the industry’s economic outlook.
“If you thought this kind of thing would happen, you wouldn’t do any deals, ever,” the casino executive said.
Michael Paladino, senior director of gaming, lodging and leisure companies for bond rating agency Fitch Ratings, calls this an “unprecedented consumer downturn, relative to the size of the industry today.”
Companies that didn’t borrow billions of dollars to go private have their own set of concerns: All casino companies have terms, or covenants, with their banks.
MGM Mirage, whose bank lenders for the company are some of the same entities that are lending money to the company’s CityCenter joint venture, recently negotiated some relief. The banks are allowing the company to increase its ratio of debt to earnings in exchange for a higher interest rate.
Although many companies don’t have any bonds coming due until at least 2010 or thereafter, MGM Mirage has a pair of bonds worth about $1.3 billion that mature next year. The company will likely take on additional bank debt or refinance the bonds at higher rates, analysts said.
Las Vegas Sands expects to open a casino resort in Bethlehem, Pa., next year and condos at its Palazzo resort in 2010, but those projects alone might not generate enough additional cash to satisfy the company’s banks, especially if earnings are depressed, analysts said. Meanwhile, the company is sinking billions of dollars into a stretch of resorts in Macau that may not boost profits for years.
Wynn Resorts has more of a cash cushion than many of its competitors. As a preemptive strike, Wynn negotiated more leeway on the company’s debt without having to pay higher interest rates for it. And yet, Wynn is also facing an earnings decline that, should it continue, could put the company’s banks in the position of calling the shots, analysts said.
These problems could be solved in an instant — by earnings growth.
In the meantime, companies will further tighten their belts. This may mean further staff cuts or delays of periodic upgrades to, say, hotel room furniture or restaurant interiors — an unappealing prospect in a business where customers expect to be coddled and entertained, even dazzled.
In a worst-case scenario, companies could sell property or land. The credit markets would have to improve first because few companies would have the ability to finance a purchase otherwise, Paladino said.
However prolonged the downturn, Paladino said the industry will eventually look different, perhaps with less reliance on debt to fuel growth.
“Nobody’s saying that banks aren’t going to lend again,” he said. “But the longer it takes, the worse things are going to be for this industry.”
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The reason Las Vegas will go bancrupt is more than the depression.
The strip looks like a demolition zone, there's almost no major entertainment, cheap buffets are not fit for homelsess to eat, there is no public transportation from nearby cities and senior citizens are unwelcome..
As times get tough the casinos are cutting the payoffs on their slots and the gambling public is aware and consequently they find other sources of entertainment. And as everyone knows years ago when the felt they had a captive audience they cut table game payoffs, now things are not so rosie for them.
The cost of fuel and the misery it caused to our economy in the real reason Las Vegas is suffering. The loss of jobs associated with the drop in players will be felt for decades. The cause, locking up all American energy resources as some grand plan to change the future. We need American jobs now and nothing could do it faster than a FAST beginning to construction of nuclear plants and drilling for oil and it refining. Don't send any more help to Washington for harry Reid and his Queen Nancy Pelosi. Save Nevada and you can save America. Vote for energy.
Customers are finally getting wise to the Great Casino Ripoff..it's not entertainment it's legalized theft and more people are realizing it.
Maybe people are just getting smarter and no longer will tolerate condescending and arrogant casino employees who they are doing you a favor by even acknowledging that you are there.
Sorry, but in the long run you get what you deserve.
I've long felt that the large neighborhood casinos were ripping off the customers by reducing the payout of slots. The continuous movement downward in the last five years is confirmed by recent reports from the Nevada Gaming Commission.
When will they realize that looser slots bring in customers? Increase payouts, advertise it and stick to it! Give customers more payouts and see them come back.
Maybe the 'new' Vegas turning its' back on what made the 'old' Vegas so popular (and profitable) is finally coming back to bite them in their arses. You can only dump on that which made you to begin with for just so long before Karma catches up. Once Vegas turned its' back on the average joe vacationer/gambler and set it sights instead on the high-rollers/whales it became the beginning of the end. Once people could no longer sit and play a $2.00 hand of blackjack regularly the casino's sealed their own fate. Who, but the most wealthy, can play blackjack at $10-20 min. per hand for very long? See.......
If the economy hadn't turned bad, they'd be making money hand over fist.
IMO this was the snowball:
People borrowed from their percieved assests (homes/land) to spend on entertainment, cars, boats, toys, etc...
Borrowing was tapped out in early 2006 so revenue started falling flat
In late 2006 energy prices took out the rest of disposable income people had and led to the current recession
Casinos had absolutely nothing to do with either of these, and if you look at the visitation numbers this place is still a gigantic destination. When the economy hits bottom and starts rebounding (as has always happened) then Vegas will too.
Old Vegas was built on gambling and cheap food. They were willing to give you a room and food to have you give them your money in gaming
New Vegas is about pampering, shopping, entertainment and dining. If you want a cheap meal you have to go to old vegas on boulder highway, Ellis Island on Koval or a downtown type place. Those are dingy and no-frills; as was in old vegas. New Vegas is all about entertainment, and gambling is jsut a piece of that. People will find the money to gamble, but they won't spend the money on the other things here, which is the problem.
On another note, in 2010-2011 when we see the rebound, watch how many people buy new cars, homes, toys and other non-necessities. Then in 3-4 years they are tapped out again and we will repeat this cycle once again. This current downturn just seems to be a little more steep than the past ones, but i remember back in the late 70's-early 80's all too well, and i can attest it was much worse then than it is now...
it's a perfect storm of many, many, many things that has ruined las vegas.
everything from bette middler ( really? REALLY? ) not pulling in anyone under the age of 50 to the cookie cutter nightclubs to the high price of gas.
i have a feeling when the "cash cow" new year's holiday ends up being way down from previous years, you'll start seeing some closings on the strip. maybe not casinos, but surely some retail and restaurants.
new year's eve is on a wednesday this year and that's the worst day to have it. people won't be able to stretch a 3 or 4 day weekend out of it like they can when it falls on a monday / tuesday or thursday / friday.
It's less the gas than the rip off on the casino floor. Honestly people blow a lot more than the rise in gas. The problem was how the Strip changed.
Nightclubs like LAX are fleecing people with long lines, riduculous tipping expectations for everyone, and ludicrous drink prices (along with nasty busboys taking full drinks away).
Slots stopped paying as well. This isn't to say people expected money out of them; they just wanted to be able to sit and drink longer.
Speaking of drinks, those girls don't seem to come by/back nearly as often. 4 years ago I could set my watch by how fast the girls came by. Now I'm lucky if I've shot my wad before they make an appearance. Also they used to bellow COCKTAILS, and now it seems more like (cocktails....).
Everything seems to be tilted towards the richer folk, and even they don't come as much. New Vegas is like a boxer looking to put you out in one or two punches, versus the old Vegas that tried to jab in and at least set you up a little.
People basically aren't angry at losing their money; they're angry at losing it so fast.
GREED, GREED, GREED at all levels will ruin the casino business, similar to the investment banks. Think of your customers and give them back some of your huge profits. THEY will bring you back up.
It's the old casino adage 'You have to send out winners to bring back players.'
Yes, only the very well-to-do can afford the 'New' Vegas.......the shopping, pampering, and expensive menu's.........regular folks who come for a vacation basically want to gamble because they don't want or can't afford to spend hundreds of dollars on dresses, shoes, purses and fancy meals.........they come here to gamble - if they want to shop they would stay home and shop for a whole lot less than what the high-end stores in Vegas are charging. The stores and restaurants would make a killing if they'd stick to a plan that caters to the middle class and stop trying to rape the people with their designer name tags.
The next year or two will be difficult. However, Las Vegas offers a unique experience, one that cannot be replicated in places like Biloxi or Temecula. From what I have seen, the major operators are moving aggressively to keep rooms filled, as rarely a day goes by when I don't receive either an email or snail mail pitch offering free or discounted rooms, free play credits, comped dining, etc.
Eliminating some of the excesses of recent years, such as the stingy slot payouts and 6:5 blackjack could also be a benefit from a more competitive business environment. In fact, I have already heard comments elsewhere that certain casinos have loosened their slots in recent weeks.