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Best of Liz Benston

Gaming Guru

Liz Benston

S&P Outlook Optimistic on Las Vegas

23 March 2004

LAS VEGAS -- A healthier economy, strong convention bookings and a gradual return in high-roller play are expected to boost casino performance in Las Vegas this year compared to last, a major ratings agency said.

In an industry report released Friday, Standard & Poor's also said Las Vegas is anticipated to outperform other gaming markets as it outpaces last year's continued recovery from the Sept. 11 terrorist attacks.

Greater visitation and a modest 2 percent increase in rooms over the next 18 months is expected to result in higher occupancy rates and room rates compared with 2003, S&P said. About 80 percent of new rooms through the end of 2005 will be concentrated at the high end of the market, which is defined as an average nightly rate of more than $185. This compares to an increase in rooms of only 20 percent in 2003 with the opening of the hotel towers at Venetian and Mandalay Bay.

However, the healthy economy is expected to drive demand for higher-priced rooms, "allowing the new rooms to be profitably absorbed," S&P credit analyst Michael Scerbo said.

"In all cases, these expansions add a significant number of rooms to what were already the largest resorts in the world. Still, demand supports the expansion and each is expected to be a very good return on invested capital," Scerbo said.

Las Vegas also is expected to witness another wave of Strip redevelopment by the end of the decade driven largely by projects at the north end of the Strip that may follow the projected opening of the Wynn Las Vegas resort in April 2005, he said.

Overall, Standard & Poor's expects the gaming industry to perform well in 2004 against a stronger economic backdrop and only a modest increase in competition in most markets, he said

Gaming revenue and earnings in most areas of the country are also expected to trend higher in spite of continued increases in labor costs, health care and other overhead expenses, he added.

Corporate ratings outlooks have improved over the past year, with "stable" outlooks for about 65 percent of rated gaming companies, he said. That compares to about 63 percent a year ago. About 9 percent of companies have "negative" outlooks, down from 18 percent a year ago.

The number of investment-grade gaming companies declined to four in 2003 from six the previous year as both Caesars Entertainment Inc. and MGM MIRAGE were downgraded in September 2003 to "BB+" from "BBB-." Only 8 percent of U.S. gaming companies rated by S&P carry investment-grade ratings, while the remainder have ratings in the "junk bond" category.

No significant shift in credit ratings is expected this year, though the continued maturation and increased competition in the gaming industry is expected to become a "large factor" affecting credit ratings in the years to come, Scerbo said.

"However, expansion opportunities within existing gaming states are expected to continue to decline this decade and approval of gaming in new jurisdictions has not occurred as rapidly as many industry participants anticipated," he said. Opportunities for companies to partner with tribal casinos are expected to remain available for the next several years but also are on the decline, he said.

Increased consolidation is likely as public gaming companies find fewer places to expand, he said. Consolidation will most likely occur among mid-cap regional operators rather than the largest companies, which already have some opportunities for future resorts or are looking abroad to more potentially profitable areas such as the United Kingdom, he said. Regulatory concerns could hamper some big-cap deals, he added.

Low interest rates and relatively good performance during the economic downturn helped gaming companies issue a substantial $11 billion in new debt last year and contributed to an additional $4 billion in debt issued so far this year, S&P said. Most of the debt was issued to refinance existing debt and fund capital projects.