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Analyst Starting Coverage of Casino Debt Issues

18 December 2000

by David Strow

LAS VEGAS, Nevada – Dec. 18, 2000 -- In a first for Wall Street, Bear Stearns gaming analyst Jason Ader has picked up coverage of the bond market.

Though a number of Wall Street firms cover both gaming industry equity and debt, Ader said Bear Stearns will be the first to cover both through a single department. In fact, Ader said the merger of equity and debt coverage has never been done in any industry.

"We have a very deep database of research on the gaming industry, we're as close to them as anyone, and really, the financial analysis has a lot of similarities," Ader said. "We just felt we were 75 percent there already, and with a little work, we could integrate the credit analysis necessary to do high-yield research ... and provide a unique, value-added research platform."

But a challenge, Ader acknowledges, will be balancing the needs of a high-yield investor against the needs of an equity investor. For example, heavy stock buybacks by a company would be viewed as good news for a stockholder -- but not so good news for a bondholder, as the move could jeopardize credit ratings.

"We will make the call on objectivity," Ader said.

A key example of the conflict is the outlook for gaming industry investors. Ader warns gaming equity investors to be cautious, as he expects a slowdown in gaming's growth in 2001 -- but also believes the situation for bond buyers is very stable, since cash flow should remain strong and stable for large gaming companies.

"High-yield is much more a function of cash flow, the company's ability to deleverage," Ader said. "From a bond buyer's perspective, the market is actually quite strong. There's not a whole lot being built, and a lot of these companies can use cash flow to pay down debt."

Ader launched debt coverage on 11 gaming companies, including Boyd Gaming Corp., Harrah's Entertainment Inc., Mandalay Resort Group, MGM MIRAGE, Park Place Entertainment Corp., Station Casinos Inc. and the Venetian. In the coming months,

Ader plans to initiate coverage of a number of other companies, including Coast Resorts Inc., Horseshoe Gaming Inc. and the Aladdin.

High-yield bonds, commonly called "junk bonds," are ubiquitous throughout the gaming industry. Every gaming company has at least some junk bonds outstanding, though MGM MIRAGE, Park Place, Harrah's and Mandalay also have investment grade debt.

"The primary financing vehicle for gaming is high-yield (debt)," said Bear Stearns gaming analyst Marc Falcone.

Ader said his top pick in gaming bonds is Station, citing the resolution of the company's difficulties in Missouri, the integration of the Santa Fe, Fiesta and Reserve into the Station chain, the high barriers of entry faced by would-be competitors in the Las Vegas locals market and strong cash flow.

Ader also issued buy ratings on:

Park Place Entertainment, calling its bonds "a core holding" offering "a stable return and limited downside, as the company utilizes its significant free cash flow to further deleverage in 2001."

"Park Place is poised to generate free cash flow in excess of $600 million a year ... we believe the company will continue to strike the proper balance between additional acquisitions/expansions, share repurchases and debt reduction," Ader wrote.

Venetian Casino Resort, saying the resort's "strategy of focusing on the burgeoning convention market has enabled it to successfully establish itself as one of the premier resorts in the (Las Vegas) market."

Ader projected the resort will generate $188.4 million in cash flow in 2001. With the resort's financial performance "continuing to exhibit marked improvement," Ader said he expects the Venetian's credit ratings could be upgraded in 2001.

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