Michael Paladino, lead gaming analyst for Fitch Ratings

By Liz Benston

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

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.