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Gaming Guru

Rod Smith
 

Gaming Industry Bonds Notch Yields of 15 Percent

20 January 2004

Gaming industry bonds posted yields approaching 15 percent in 2003, even better than their yields the year before but seriously lower than returns from similarly rated bond offerings, analysts said Monday.

Wall Street analysts attributed the softer returns to a mid-course correction in the gaming sector and said industry fundamentals remain strong heading into 2004.

In a reversal of fortunes from 2002, the Deutsche Bank index for gaming industry, grade B bonds underperformed U.S. Treasury-issued grade B bonds in 2003 and the Dow Jones casino index for stocks.

Investments in gaming industry bonds on the average returned investors 14.82 percent, compared with a return of 27.91 percent on comparably rated Treasury issues, Deutsche Bank analyst Andrew Zarnett said.

"Along with the rest of the high-yield market, gaming bonds performed well last year," he said.

Also by comparison, investments in gaming stocks included in the Dow Jones casino index gave investors an average return of about 67 percent, compared with the Dow Jones industrial average, which appreciated about 21 percent in 2003.

"But because ... gaming (bonds) performed so well in the preceding year, they had less opportunity to outperform (the broader market) this year," Zarnett said.

In 2002, investments in gaming industry bonds on the average returned investors almost 13 percent, but that compared with a return of less than 3 percent on comparably rated Treasury issues, he said.

Also in 2002, investments in gaming stocks included in the Dow Jones casino index gave investors an average return of just under 10 percent, compared with the Dow Jones industrial average, which fell 25 percent in 2002.

Bear Stearns & Co. analyst John Mulkey agreed that soaring gaming industry yields in 2002 paved the way for more modest returns, or a course adjustment, in 2003 and added that call constraints also crimped yields for industry bonds.

"A lot of gaming bonds are callable at certain rates and can only perform so well," he said.

Zarnett said huge amounts of cash, about $25 billion in the 11 months through November, flowed into the U.S. bond markets in 2003, Zarnett said, a record for at least the past 10 years.

"For investors, the point is gaming (bonds are) more conservative and safer, but it is also more consistent," he said.

Brian Gordon, spokesman for Applied Analysis, a Las Vegas-based financial consulting firm, said 2003 was a strong year for stocks compared with recent years, which generally softens bond markets and leads investors to shift funds to more profitable investments.

Still, bond yields demonstrate the strength of the gaming industry and investor confidence in tourism in general, Gordon said.

Generally, mutual funds, insurance companies and pension funds invest in the bond market, rather than individuals, because incremental units come in denominations of $1,000 so the average price is significantly higher than a unit of stock, he said.

However, individuals invest in the bond market, including gaming bonds, through investments in mutual funds, Zarnett said.

Companies offering mutual funds invested in gaming bonds include Merrill Lynch, American General Financial Services, Putnam Investments and Federated Investors, industry sources said.

Looking ahead to 2004, analysts predict more conservative yields than in the past two years.

"With the potential for (interest) rate increases later in the year, it's likely yields in the bond market will soften somewhat, which will lead to smaller inflows (of cash)," he said.

However, with no new major resorts set to open in 2004, Zarnett said it was likely demand would increase in Las Vegas and Atlantic City, improving industry fundamentals overall.

"Plus, Las Vegas is going to gain the added benefit of the return of the business traveler," he said.

Despite the strong fundamentals, Bear Stearns' Mulkey projects "single-digit, couponlike returns for the gaming (bond) index overall in 2004.

"In the context of a strong high-yield market, we'd expect the returns to result in another year of underperformance," he said.