Cards Stacked Against Hotels, Casinos, Leisure in 2009
Once considered recession-resistant, the gaming, hotel and leisure industries are proving to be anything but in 2008, and Standard & Poor’s sees more pain ahead in 2009.
Credit defaults in U.S. gaming have soared this year, starting with Legends Gaming LLC in the first quarter of 2008. The credit crunch, weakening U.S. economy and surging energy costs have all hit consumer discretionary spending, according to the S&P’s “U.S. Gaming Defaults Reach Record Levels.”
In “Hotels & Gaming: The Odds Favor Consumers Staying at Home,” S & P said the cards will continue to be stacked against hotels and casinos over the next couple of years.
While rising defaults have been the most severe consequence for rated gaming companies under existing operating and credit market conditions, rating activity has been significantly negative in the first nine months of 2008, as highly leveraged balance sheets have not been able to tolerate the unprecedented operating declines, often leading to covenant problems.
A related report ranked the credit of gaming, lodging and leisure companies from strongest to weakest. Harley-Davidson Inc. (HOG) tops the list with an A/A-2 rating with negative implications and UTGR Inc. sits at the bottom of the list with a D rating.
Even so, S&P said recovery rates for bond holders in gaming and leisure are in the top one-third of all industries, with “substantial recovery” of 70 to 90 percent of principal expected.
In an industry credit outlook, “The Economic Slowdown Continues to Weigh on U.S. Gaming, Lodging, and Leisure Sectors,” S & P compared economic conditions for casinos in Las Vegas, Atlantic City and Macau. Revenues in Las Vegas were down 6.6 percent year-over-year in August and revenues in Atlantic City were down 5.2 percent. In contrast, Macau has seen its gaming revenues surge 52 percent in the same period.
Ultimately, hotels and casinos tend to do roughly as well as the economy, which is exactly what is posing problems for them right now. At the moment, the economic outlook is for a mild recession, albeit a long one. And that could have consumers sitting out the next few games and staying put for a while.
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