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Howard Stutz

"Sluggish" U.S. gaming worries Moody's Investors Service

28 June 2012

Moody's Investors Service expressed a cautious view of the U.S. casino market Wednesday, warning that weak gaming revenues and downward consumer trends could place several companies, including Caesars Entertainment Corp. and CityCenter Holdings, "at great risk."

Officials from the companies didn't dispute Moody's assessment that the U.S. gaming market has stalled but rejected notions the businesses are in trouble.

"Our debt is old news," Caesars Entertainment Senior Vice President Jan Jones said of the company's nearly $20 billion in long-term debt, an industry high. "It's the same debt we've had for the last five years, and we don't have any maturities coming due any time soon. The disappointment about the report is that Moody's is correct, the market is sluggish right now."

Moody's said consumer confidence has weakened, payroll expansion has slowed, and retail sales have softened, slowing the improvements in U.S. gaming revenues.

"The improving trend in gaming revenues in place since the middle of last year appears to be stalling," Moody's gaming analyst Peggy Holloway said. "Momentum started slowing in March, and then in May gaming jurisdictions reported outright declines in gaming revenue."

Falling gasoline prices and low interest rates have increased consumers' disposable income, which could boost gaming demand, Holloway said.

But Moody's pointed toward a decline in consumer sentiment with chronic high unemployment and "fear of contagion from the European debt crisis" as troubling signs.

"I think they make some great points," said David Schwartz, director of University of Nevada, Las Vegas Center for Gaming Research. "(There are) a lot of potential negatives, particularly nationally. And debt continues to be a concern."

Holloway expressed concern for industry giant Caesars Entertainment, which operates 10 Strip resorts, including Caesars Palace, Harrah's Las Vegas, Bally's and Planet Hollywood; and the joint venture between MGM Resorts International and Dubai World that operates CityCenter, which includes nongaming hotels, residential, retail, dining and the centerpiece Aria hotel-casino.

In the report, Moody's said "significant near-term maturities or highly leveraged capital structures" could be challenged "if declines in gaming demand accelerate."

Moody's also cited the recently opened Revel Atlantic City and Cannery Casino Resorts, which operates the two Cannery casinos in suburban Las Vegas, as companies that could be at risk.

"Although we expect most companies to have a reasonable chance of refinancing their debt when they need to, the cost is likely to rise," Holloway wrote.

Jones said Caesars Entertainment took steps to refinance portions of its debt by extending maturities past 2015. A cost-cutting effort that began in 2011 is also expected to slice more than $400 million from the books by year's end.

Caesars has been able to manage the debt load since the company's $29 billion private equity buyout in 2008.

"It's always an easy target," Jones said.

MGM Resorts Senior Vice President Alan Feldman said the company's investor's relations division "didn't have much to say" about the Moody's report because it is an analyst's judgment call.

"There were some nice things said about Nevada, and we're Nevada-centric," Feldman said. MGM Resorts operates 10 Strip properties, including Bellagio, MGM Grand and The Mirage.

Feldman called CityCenter's debt, "minimal." In January, CityCenter reduced the balance of its debt from $1.85 billion to $500 million and extended the due date to 2015. MGM Resorts as a company has long term debt of $13.4 billion.

Some U.S. gaming markets were viewed as doing better than others.

The Moody's report said regional challenges in the Northeast and central United States include potential oversupply and negative growth. But the Southeast saw gaming revenues increase in relation to last year, when many casinos were closed by flooding.

In Las Vegas, gaming revenues have increased three out of the four months in 2012 that have been reported by the Gaming Control Board, including an 18.37 percent increase in January, the state's first $1 billion month since 2008.

There is a difficulty in absorbing new supply in some markets, Moody's said. Revel in Atlantic City, Resorts World in New York and Rivers Casino in suburban Chicago "do not appear to be boosting gaming demand in their markets," Holloway wrote.

Caesars and MGM Resorts are seeking casino expansion in emerging gaming jurisdictions. Caesars recently opened the first of two casinos in Ohio.

"There is no way anyone would say Ohio, Massachusetts, or Maryland are oversaturated gaming markets," Jones said. "They are underserved."