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Best of Liz Benston

Gaming Guru

Liz Benston

Wall Street's happy now, but Boyd's delay may prove costly

4 August 2008

When Boyd Gaming announced in January 2006 that it would build a multibillion-dollar resort complex called Echelon, Las Vegas' tourism economy was riding high and banks were only too willing to lend money for major projects.

Then tourism began to slow down in Las Vegas, worsening just as the mortgage crisis hit and banks, pummeled by defaults on subprime loans, were unwilling to lend new money. Fuel prices skyrocketed, making travel more expensive.

The slowdown has grown deeper than insiders had predicted.

With little sign of improvement on the immediate horizon, analysts say Boyd had little choice but to announce, as the company did Friday, that it would delay construction of Echelon. The company's stock soared as investors applauded the short-term removal of a project viewed as a major risk.

"In spite of the looming economic slump, Boyd has essentially removed all uncertainties surrounding its biggest capital project ... this significantly improves Boyd's liquidity and balance sheet," Deutsche Bank gaming bond analyst Andrew Zarnett said in a research note to investors.

The company expects to resume construction next year, though some investors, worried about the deepening tourism slump in Las Vegas and the complexity of resuming construction on the resort, expect a longer delay.

Before bank financing dried up a few months ago, Boyd secured cheap financing for $3.3 billion of the $4.8 billion project, including three of Echelon's hotels. A little more than a year ago, Boyd locked up an interest rate of less than 5 percent on these loans, which mature in May 2012.

But there was a problem: Key pieces of Echelon hadn't been financed.

These include a $500 million retail mall and two boutique hotels worth about $1 billion. By the time Echelon was announced, Boyd had lined up a joint venture with Morgans Hotel Group to build the Mondrian and Delano hotels. Boyd struck a second joint venture deal with mall developer General Growth Properties in May 2007, before the mortgage meltdown and consumer spending slowdown, which hit the retail sector harder than most.

Analysts applauded the delay announced Friday, saying it didn't make financial sense for Boyd's joint ventures to incur exorbitant interest rates to finance construction amid the downturn. It also buys Boyd time to await a turnaround in the economy.

At first glance, it appears Boyd made a strategic mistake by not securing financing for the entire project at the outset.

But that was standard operating procedure in years past, when companies big and small signed joint venture deals contingent upon construction financing that would be obtained later.

Boyd Gaming spokesman Rob Stillwell has an explanation for that: The company had a general picture of what Echelon would look like in January 2006 but wasn't ready to secure financing until it had completed more detailed design work on the resort. After completing thousands of additional drawings for rooms and other amenities last year, the company increased the budget of Echelon by about $800 million, in part to reflect an increase in the cost of construction materials.

By that time, analysts say, it was too late to find a good deal.

Some analysts say Boyd did the best it could given current market conditions, but some are wary of Echelon's future.

Profit expectations for the resort are partly based on the bargain-basement interest rate Boyd lined up when times were good. Major resorts have historically gone over budget in Las Vegas, the most extreme example being MGM Mirage's CityCenter, which will cost more than $9.2 billion, up from initial expectations of $4 billion.

Some analysts say Echelon could end up costing more once the bulk of the resort is under way and that Boyd would have to return to the banks that financed most of the resort for more money. Those banks might want to renegotiate higher rates, analysts say.

Boyd executives say it's a matter of time before the economy rebounds.

"When we financed the $3.3 billion, gas was $2.50 a gallon," Stillwell said. "Everything was different and nobody thought we'd be faced with this type of adversity. A lot can change in a year."

By the time Boyd announced Echelon, other developers had plans for nearly a dozen upscale towers nearby.

Ultimately, Echelon is an example of the increasing risks casino companies are forced to take to compete on the Strip — even when the timing isn't right.

Wall Street's happy now, but Boyd's delay may prove costly is republished from