Casino Gaming Referenda Reviewed

19 November 1996

CHICAGO-- Duff & Phelps Credit Rating Co. recently gave the following analysis of the gaming votes around the US and what the results mean for gaming interests:

Voters in Arkansas, Colorado, Iowa, Mississippi, Ohio and Washington defeated initiatives that would have allowed for the introduction or the expansion of casino gaming, while voters in Michigan approved a proposal to develop up to three casinos in Detroit. Also, voters in Louisiana approved the preservation of the 15 non-Indian casinos in the state, including the bankrupt Harrah's Jazz land-based casino.

Voters in Louisiana, which voted on a parish-by-parish basis on whether to preserve casino gaming, decided to maintain an industry that has provided significant jobs and tax revenues for Louisiana since commencing operations in 1994. The six parishes in which 14 riverboat casinos operate will continue operations, while the Harrah's Jazz casino in New Orleans, which was shuttered after a bankruptcy filing last November, will attempt to complete its financial restructuring and reopen in 1997.

From a credit rating perspective, the ballot results are largely favorable, particularly for the smaller, regional operators with casinos in Louisiana, southeastern Indiana and/or Tunica, Miss., such as Argosy Gaming, Casino America, Players International and Horseshoe Gaming.

Had voters decided to abolish casino gaming in Louisiana, the above companies, all of which are high-yield issuers, would have been allowed to continue operating in Louisiana until their current licenses expire. However, because these entities are not highly diversified, their sources of operating cash flow would have been diminished, and their ability to repay their debt obligations could have been severely hampered.

In addition, the defeat of the proposals to allow casino gaming at a racetrack in Hot Springs, Ark., and in Mississippi's DeSoto County removes the threat of increased competition for the already crowded Tunica market, where 10 casinos, including Horseshoe Gaming, are fighting for market share, as well as in Coahoma County, Miss., near the Arkansas border, where Lady Luck Gaming operates. Also, the defeat of the gaming initiative in Ohio enhances the competitive position of Argosy Gaming's soon-to-open Lawrenceburg, Ind., casino, which will rely on Cincinnati as its primary feeder market.

The impact of legalized casino gaming in Detroit will have a detrimental effect on the government-owned Windsor, Ontario, casino that currently monopolizes the Detroit market. The operation is managed by a venture that is equally owned by Circus Circus Enterprises, Hilton Hotels and ITT Corporation. However, the cash flow that these large, diversified entities derive from managing the casino is immaterial to their creditworthiness.

Most of this year's gambling initiatives were unsuccessful due largely to improved state and local economies, vocal conservative opposition and a curtailment of corporate financing of the initiatives. The proliferation of casino gaming throughout the country has slowed since previous initiatives were successful in states such as Illinois, Iowa, Louisiana, Mississippi and Missouri in the early 1990s. At that time, many states and localities viewed taxes from casinos as a measure to make up budget shortfalls. Well-financed corporate lobbying campaigns from Las Vegas gaming companies and local entrepreneurs aided the legislation. More recently, in 1994 and 1995, voters defeated most new gaming referenda, giving pause to gaming companies' lobbying efforts this year.

As a result of the lack of expansion opportunities in new domestic markets, the major gaming companies such as Mirage Resorts, Circus Circus Enterprises, Hilton Hotels and ITT Corporation, are focusing their resources largely on the opportunities available in the existing jurisdictions of Las Vegas and Atlantic City.

Mirage Resorts is building a $1.35 billion luxury casino resort in Atlantic City and has plans to co-develop a $2 billion casino resort complex in the Atlantic City marina district with Circus Circus and Boyd Gaming Corporation. Circus Circus will soon announce the details of its plans for a $700-800 million Las Vegas strip casino. Hilton Hotels is entering the Atlantic City market through its pending acquisition of Bally Entertainment and has plans to build a $450 million casino on the Las Vegas strip. ITT Corporation is investing $2.5 billion to modernize and expand Caesar's Palace in Las Vegas, build new movie-themed casinos with theme restaurant operator Planet Hollywood in Las Vegas and Atlantic City, and expand hotel room capacity at Caesar's Atlantic City. Also, MGM Grand and Sun International are expected to invest substantial sums in developing new casinos on the Atlantic City Boardwalk.

These investments will raise the competitive stakes in the industry as this new capacity will place pressure on operators that do not possess attractive properties in superior locations, strong management, diversified sources of cash flow, good liquidity and access to the investment grade capital markets.