Moody’s Sees Bleak Outlook for Gaming Industry
Casinos are starting to feel the pinch of a slowing economy , fierce competition and tax-hungry state governments. Moody’s has cut its outlook for the US gaming industry to negative from stable as the slowing economy is causing “weaker visitation and spending trends.”
The economic slowdown and possibility of a longer-term, consumer-based recession come at the same time that fierce competition within and among gaming jurisdictions is requiring gaming companies to spend heavily on promotion and capital investment, Moody’s says in a Special Comment on the industry. Other key points of the report:
- Reduced access to capital markets is increasing overall risks to the sector’s credit profile. Decreased access to capital is also likely to result in the cancellation or delay of some planned development projects, potentially hurting longer-term revenue and cash flow growth rates.
- Many US gaming markets are in their relative infancy and do not have enough of a documented history to indicate how they will perform during a period of prolonged economic weakness.
- Unfavorable legislative initiatives designed to address possible state budget deficits could result in higher gaming taxes and/or increased competition.
- Long-term fundamentals of the sector, including increased acceptance and popularity of gaming and a demographic shift towards age groups that exhibit a high propensity to gamble, remain favorable, but they may not offset near-term economic and competitive challenges.
- Negative rating actions are expected to significantly exceed positive rating actions in 2008. Eleven US gaming issuers are currently on review for possible downgrade and six have a negative outlook. Combined, these issuers account for almost 25% of the total number of rated US gaming issuers.
Several gaming states reported declines in gaming revenue for the month of January 2008 from a year earlier. Illinois was hit the hardest, with a decline of 17%. New Jersey followed with a 10% decline in gaming revenues. Other states reporting declines include Indiana (-8%), Nevada (-4.7%), Louisiana (-1.7%), Missouri (-1.6%), and Iowa (-1%). Although Illinois’ gaming revenues have been negatively impacted by the slowing economy, the dramatic decline that occurred in January 2008 is largely believed to be the result of a smoking ban that went into effect in the beginning of 2008.
The US gaming sector is facing its toughest challenge since the 9/11 attacks, which sharply curtailed leisure travel.
Unprecedented leveraged buyout activity in the US gaming sector also adds to the sector’s vulnerability, Moody’s says. “Two of the largest gaming companies, Harrah’s Entertainment, Inc. and Station Casinos, Inc., are operating with substantial amounts of debt resulting from leveraged buyout transactions. These two companies, combined with Penn National Gaming, Inc., a pending leveraged buyout that is expected to close sometime in 2008, own and operate a significant amount of gaming assets throughout the US. We expect these companies will compete more aggressively than they have in the past in order to generate the cash flow needed to service their substantial debt loads. ”
More details and current ratings on gaming companies are available in Moody’s
Economic Slowdown Hits U.S. Gaming Sector.
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