Moody’s: U.S. gaming vulnerable to faltering recovery

Why don’t they just say they might cut MGM’s credit rating?

New York, June 28, 2011 — Any reduction in consumer spending on gambling could undermine recent, if modest improvement in the U.S. gaming industry and ultimately lead to some rating downgrades, says Moody’s Investors Service in a new report. Moody’s is concerned that a growing sense that the economic recovery is slowing could prompt such a pullback.

“We are concerned that consumers’ propensity to spend on gaming activities will not withstand another hit to their wallets, even a small one,” says Keith Foley, a Moody’s Senior Vice President. “Unfortunately, an extended period of consumer weariness—or any economic event that hurts consumer demand for gaming—could have a material negative effect on company earnings and lead to some downgrades.”

The Federal Reserve’s announcement last Wednesday that the U.S. economy was expanding less quickly than expected and unemployment will remain high gave consumers additional reasons to worry, says Moody’s.

Most vulnerable to a pullback in consumer spending on gambling in the U.S. would be highly levered gaming companies with low ratings. Unfortunately roughly 30% of Moody’s 50 rated U.S. gaming companies have corporate family ratings of Caa1 or below, and more than a majority—about 54%–have corporate family ratings of B3 or below. Many of these companies have been counting on the economic recovery to grow them out of capital structure issues such as high leverage and large debt maturities.

“Any blip on the road to recovery could force many to go back to lenders for covenant relief or possibly a renegotiation of their existing debt obligations,” says Foley.

Companies Moody’s perceives as reliant on continued economic improvement include Caesars Entertainment Corp. (Caa2) and MGM Resorts International (B3). While these and other companies including Boyd Gaming Corp. (B2), Isle of Capri Casinos Inc. (B2) and Pinnacle Entertainment Inc. (B2) have lowered their expenses and created breathing room in their covenants and debt maturity schedules, they are still considered highly leveraged and have company-specific, near-term issues that could be exacerbated if consumers curb their gambling budgets.

Best positioned to weather any retreat in gaming spending in the U.S. would be companies that have either expanded operations into high-growth overseas markets such as Las Vegas Sands Corp. (Ba3) and Wynn Resorts, Limited (Ba3), or are highly and effectively diversified across the U.S. such as Penn National Gaming, Inc.