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Howard Stutz

Fitch Ratings says recovery not in cards in 2010

23 December 2009

LAS VEGAS, Nevada -- The impact the recession had on the casino industry in 2009 has not been completely accounted for, but by all measures the year will go down as the worst on record.

Through October, gaming revenues have declined more than 12 percent both on the Strip and throughout Nevada. Monthly revenue figures statewide have fallen to 2003 levels.

Get ready -- 2010 may not be any better according to one casino industry analyst.

Fitch Ratings Service, which follows the high-yield bond markets, believes gaming revenues nationwide will continue to be pressured by the economy. Spending trends remain weak and unemployment will continue to reduce how consumers dole out their discretionary dollars.

Also, continued home foreclosures and the tightened credit markets will work to keep consumer spending at depressed levels.

Fitch Senior Director Michael Paladino said the credit outlook continues to be unfavorable to the casino industry.

"While the most severe near-term liquidity issues have been mostly addressed, the gaming industry will remain in a state of balance sheet repair for at least the next year or two," Paladino said. He was the primary author of "When Will the Tables Turn," an outlook on the gaming industry published by Fitch.

"Recurring free cash flow profiles have been impaired, so the pace of the economic recovery over the next year will go a long way in determining if some companies have done enough to survive the downturn, or if the financing actions so far have just been kicking the can down the road," Paladino said.

In the report, Fitch outlined that many of the largest gaming markets in the U.S. have an overabundant supply of casinos, but the demand for gaming has weakened.

On the Strip, the largest impact on the industry is CityCenter. Aria, CityCenter's only hotel-casino, opened last week.

"The question regarding whether CityCenter will profitably grow the Las Vegas market, or result in significant profit cannibalization of existing properties, is about to be answered," Paladino wrote in the report.

However, whatever the impact, the ratings service believes hotel-casino operators will be forced to make a financial decision about their operations.

"Fitch believes the highly competitive environment will be even more intense in the next 12 months," Paladino wrote. "Profitability will remain under pressure as operators will be aggressive on pricing and marketing through 2010."

While casino operators could continue to struggle, the gaming equipment sector might be ready for a rebound, Fitch said. New markets, such as Maryland, Kansas, Ohio and potentially Massachusetts, could help product sales.

The ratings service said gaming companies like CityCenter developer MGM Mirage have focused on increasing their convention bookings for 2010 as another way to grow the market.

In an interview with Bloomberg News last week, Harrah's Entertainment Chairman and Chief Executive Officer Gary Loveman said convention bookings would be "lean" in 2010 but show improvement in 2011. Harrah's operates large convention facilities at Caesars Palace and the Rio.

"Visits by higher-end convention and meeting customers are off dramatically from where they've been and that's not going to get much better in 2010," Loveman said. "2011 looks much, much better. There will certainly be a lot of pent-up demand."

The opening of CityCenter added almost 6,000 more hotel rooms to the market, increase the room inventory in a market which has brought about some of the lowest Strip room rates in two decades.

The economy has caused visitors to spend less on gaming, rooms and nongaming amenities, such as restaurants and entertainment.

Loveman agreed with the Fitch report that consumer spending will continue to be challenged.

"Demand might improve marginally, not profoundly, and at the same time we'll have this additional supply to absorb," Loveman said. "You probably net out at a position that doesn't look demonstrably different from what it is today, which is pretty bad."