Six Questions for:

Michael Paladino, lead gaming analyst for Fitch Ratings

Michael Paladino, lead gaming analyst for Fitch Ratings, says gaming is still “an attractive business with high profit margins of 25 and 35 percent and significant cash flow” despite recent problems with debt. That’s in contrast to automaking and airlines, whose problems run deeper.

By Liz Benston (contact)

Monday, July 6, 2009 | 2 a.m.

Audio Clip

Sun reporter Liz Benston speaks with Michael Paladino, head gaming analyst for Fitch Ratings.
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Fitch Ratings

When business was booming, people like Michael Paladino — who assess bankruptcy risk — were little seen or heard. In the recession, Paladino, the lead gaming analyst for bond rating agency Fitch Ratings in New York, is making headlines with his assessments of the casino industry’s cash crunch.

What’s your economic outlook?

It’s pretty uncertain. Things aren’t improving but they’re certainly not getting worse. We expect a slow recovery, whether that begins toward the end of this year or the beginning of next year.

Casino bonds are trading for cents on the dollar. Are investors being cautious or running the other way?

Sentiment has improved over the past couple of months. The market is slowly opening up. The less risky of the high-yield, or lower-rated companies, like MGM Mirage, are now able to tap the capital markets, not just investment-grade companies.

Have investors grown more comfortable then?

Their risk tolerance has increased. Companies like Ameristar, which has stable cash flow, are able to issue debt without giving banks collateral. Companies with a weaker credit profile, like MGM, have to do it with collateral. The industry has become a greater investment risk, given how poorly it performed in the downturn. But that doesn’t mean capital will dry up. It will come with higher risk.

Casinos typically operate with a lot of debt. Is this an intractable problem?

This isn’t an industry structure problem like autos and airlines but a capital structure problem. Gaming is still an attractive business with high profit margins of 25 and 35 percent and significant cash flow after maintenance expenditures. Too much debt makes you vulnerable to a downturn. This restructuring process is healthy for the industry.

Are the Las Vegas gaming companies out of the woods?

A lot will depend on how the economy recovers, when it starts to recover and how quickly. If consumer spending continues to deteriorate, some companies that were out of the woods could be under pressure again.

Has the recession changed the way casinos seek capital?

Companies are expected to rely less on bank debt than before, refinancing with bonds, issuing equity, or simply paying off the loans.

As banks seek to reduce debt and push risky loans off their books, they have been willing to negotiate with companies, offering relief on loan terms or extending maturities as an alternative to taking back underperforming loans.

Discussion: 8 comments so far…

By term25600

7/6/09 at 5:16 a.m.

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Las Vegas is due for a remake of itself again I think. A bit less of the constant physical re-construction, and a return to the sin city and "what happens in vegas...." reputation. In short, the 'experience' you have coming to las vegas rather than the physical sights.

Its time for such things as real promotion to the gay people for getting 'married' here. And its also time to eliminate the ban on prostitution in clark county. And don't tell me it brings crime. What brings crime is making victimless activities criminal, forcing it underground.

If prostitution is ok in other counties, then its certainly not such a wicked thing, is it? Rather than have it happen in the back alleys, isnt it better to have it just the part of normal life that it is anyway? Doesnt mean that everyone is going to engage in it, but for those that do, it happens right now anyway.

Some casinos would promote it behind the scenes as they did before. Others wouldnt. And you don't have to go into debt to allow prostitution as it was in earlier times.

Another 'free' re-invention is for residents here to embrace the tourist culture we have here. Do something nice for the tourists that you meet every day. Let them switch lanes if they don't know where they are going. Let Las Vegas have a reputation that the people here are friendly !! Does that cost so much?

Talk to tourists in the buffet or show lines at the casinos. Make them feel comfortable.

And don't tax the hell out of them such that we get the reputation that big cities like Chicago, NY, and Washington DC have. I don't even want to go to those cities because the taxes are ridiculously high.
By Frankm507

7/6/09 at 9:29 a.m.

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What a joke! Paladino has to have some ties with the casinos. They pay these so called ratings companies to give out positive reports. Looking at all the halted construction on the strip, who in their right mind can say that casinos are still a good investment? I've said before, all the baby boomer disposable income is gone!!401K's and housing values plummeted. Just like a lot of jobs gone for good, so is the disposable income!! Don't compare to the airlines either. I don't see airlines borrowing billions to make palaces when they have over-capacity!
By Frankm507

7/6/09 at 9:39 a.m.

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Can the LV Sun at least question the statements these guys make - EVER? Like how can he say casinos are still a good investment when most of them have been operating on the brink? Without any questions or verification, these articles are lame and sound more like infomercials.
By dave202

7/6/09 at 1:05 p.m.

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How old is this guy? 14? What does he know about business or the casino business!??
By BigStack

7/7/09 at 7:45 a.m.

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Prostitution will never be legalized in Clark County. Why? It would kill the convention business.

As much as conventioneers employ the prostitutes, the people who book the conventions would never bring themselves to book them in a city with legal prostitution.
By kenodave

7/7/09 at 10:25 a.m.

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Who would again invest in casinos when gaming companies are only offering pennies on the dollar for current debt? Companies like Stations and Harrahs come to mind when you think of investors getting the shaft and losing big time on their investments. Yes, I want to invest in Station casinos so they can turn around and offer me 50 cents on the dollar so their owners can buy a new castle for $28 million.

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By David001

7/7/09 at 11:24 a.m.

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Can prostitution be decriminalized if not legalized?
By appeal2

7/8/09 at 3:48 a.m.

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Vegas must return to its roots. Once upon a time the little guy came to Vegas to get treated like a big shot. Everyone knew your name and personal service was the hallmark of Vegas. Then it went mass market, impersonal service. This worked for a while, but now that gambling is no longer an infinite market and that there are so many outlets around the world, people want to go where they are treated well. And unfortunately, with a few notable exceptions, that hasn't been the case in Vegas. The M marks a true return back to what made Vegas great. While the mob were tough taskmasters, they knew what it took to make people comeback, year after year. I remember my parents would go to the Dunes at least twice per years. Everything was comped and they would rave about their trip for weeks, especially if they won.

But the bean counters took over the town. Comps became harder to get and the town really lost a lot of its allure.