Report: Industry’s demand will rebound, but more pain ahead

By Steve Green

Thursday, June 4, 2009 | 2:05 a.m.

U.S. hotel-casino operators may see signs of stabilization in the downward spiral of their industry -- but the outlook is far from rosy.

That's according to credit rating agency Moody's Investors Service, which Wednesday issued a report updating its industry outlook.

The outlook for the U.S. gaming industry remains negative amid uncertainty about the timing and degree of a U.S. economic recovery, Moody's said. And negative trends in place since the beginning of 2008 are continuing and there have been no meaningful signs of stabilization, Moody's said.

"The trend in ratings is down for many U.S. gaming companies," Moody's Senior Vice President Keith Foley said in the report. About 72 percent of U.S. gaming debt issuers now have a negative outlook or are on review for possible downgrade and nearly 43 percent of U.S. gaming companies are rated Caa1 (high risk of default) or lower.

"The greatest risk facing U.S. gaming companies is the possibility that consumers will further reduce discretionary spending on gaming during the next 12 to 18 months," Foley said.

Moody's said that while Las Vegas has been hit the hardest by the recession, gaming companies that have significant exposure to the Atlantic City or Connecticut gaming markets or that have near-or intermediate-term liquidity concerns are most at risk.

Longer term, gaming demand will eventually rebound, Foley said. "However, we do not assume that because gaming demand declined along with the economy, it will return to pre-recession levels once the economy improves," he said.

This view has been expressed by other forecasters, who note Americans are now starting to save money and are spending less on discretionary items and activities such as entertainment and gambling.

Moody's said that one recent positive development has been the implementation of cost-cutting measures designed to maintain cash flow as revenue declines. But there's a catch with that.

"While we view these measures positively from a rating perspective, there is a risk in some cases that cost-cutting might affect the quality of the gambling proposition and customer experience," said Foley.

Also weighing in on the industry this week was Deutsche Bank debt securities analyst Andrew Zarnett, who remains concerned that Las Vegas operators will suffer when CityCenter and other projects open in an already-over supplied market.

In reviewing first quarter financial results, he said management of select Las Vegas operators indicated the free fall in gaming and nongaming revenue is likely over for Las Vegas as trends seem to be stabilizing.

“While many believe that things may get better for Las Vegas, we continue to believe that Las Vegas will remain challenged in fiscal 2009, albeit better than that of (the fourth quarter of 2008), as unemployment continues to rise and consumer spending declines,'' Zarnett wrote in a report. “Looking at 2010, we also remain concerned with the incremental capacity (approximately 12,500 rooms) coming online over the next 12-18 months, which we believe will significantly impact existing Las Vegas gaming operators.”