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In a report on U.S. gaming released late Wednesday, Moody's Investors Service said there is a "high degree of uncertainty" over how much gaming trends will improve through the end of the year. Analysts are also concerned about the sustainability of those improvements.
In addition, many American gaming corporations -- including MGM Resorts International, Harrah's Entertainment, Boyd Gaming Corp. and Isle of Capri Casinos -- took measures to refinance long-term debt over the past year. But analysts believe the companies may have only succeeded in delaying an inevitable credit crunch.
"The industry, after having two years of a down market, would welcome having stable cash flows," said Moody's Senior Vice President Keith Foley, one of the authors of the report. "We still have a cautious view of the U.S. gaming sector even as those severe year-over-year declines in monthly gaming revenue have subsided. In our view, the gaming industry is not much better than it was, but it's also not much worse."
In Nevada, gaming revenues have recovered somewhat from 2009's record decline of 10.4 percent and the 9.7 percent decrease of 2008. Through May, gaming revenues statewide are down less than 1 percent, but are up 4.4 percent on the Strip, due in large part to a 32.9 percent increase in February.
Moody's told investors the bulk of the casino industry does not have the financial flexibility to absorb a year or more of flat profits. Companies with substantial debt may find it difficult to address large payments and expiring maturity dates without an equity infusion or some other deleveraging event.
The key to the industry, Foley said, is consumer demand for gaming. If discretionary spending by consumers remains depressed, the result could leave some companies short.
"At this point, some companies need overall business conditions to improve, not just stabilize, for (cash flows) to rise and leverage ratios to improve in time to refinance outstanding maturities on less-than-onerous terms," Foley said in the report.
The report cited MGM Resorts and Harrah's as two companies that took measures to improve their credit profiles, although both remain highly leveraged. MGM Resorts' debt is more than 10 times the company's cash flow, Moody's said. Harrah's has more than $22 billion of total debt and a debt-to-cash flow ratio of more than 10 times.
"We do not believe Harrah's will be able to generate enough cash to improve its leverage and credit metrics, especially during a tepid recovery," Foley wrote in the report. "In all likelihood, Harrah's will have to sell assets, issue equity or restructure its debt obligations. Obstacles accompany all of these measures, however, and they likely would result in impairment to debtholder claims."
In an interview, Foley wondered if Harrah's was "too big to fail. We just don't know what the company's next step is going to be."
On the opposite side, Wynn Resorts Ltd. and Las Vegas Sands Corp. are less affected by the current situation because of their substantial holdings in Macau, where revenues are up more than 70 percent through June.
Foley said the revenues generated by the companies' Macau resorts more than make up for weakness at their properties on the Strip. Las Vegas Sands also benefits from its newly opened $5.7 billion resort in Singapore, where only two casinos are allowed to operate.
"Those companies are in great position to benefit as new foreign markets open up," Foley said. "They now have a track record for success."
Other factors that could unfavorably influence the industry's financial prospects include legislative actions that result in higher gaming taxes as states address budget deficits, higher financing costs for gaming companies and lower development spending by casino operators.
"While all three factors are clearly a byproduct of the economic recession, we expect they will have long-lasting effects and could substantially mute the sector's recovery prospects," Foley said.
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