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Gaming Industry Bonds Lag Market

Returns from gaming industry bonds trailed the broad bond market in the first quarter, but analysts are optimistic about such investments over the rest of the year.

While the Deutsche Bank index for gaming industry grade B bonds trailed U.S. Treasury-issued grade B bonds in the first quarter, they led the Dow Jones casino index for stocks and the broad stock market.

Investments in gaming industry bonds on the average returned investors more than 2.2 percent in the first quarter, compared with a return of 7.8 percent on the high-yield bond index, Deutsche Bank analyst Andrew Zarnett said.

Also by comparison, the Dow Jones casino index and the Standard and Poor's 500 index both lost 6 percent in value in the first quarter.

Generally, mutual funds, insurance companies and pension funds, rather than individuals, invest in the bond market because the incremental units come in denominations of $1,000 so the average price is significantly higher than a unit of stock, he said.

However, individuals invest in the bond market, including gaming bonds, through investments in mutual funds, Zarnett said.

Companies offering mutual funds invested in gaming bonds include American General Financial Services, Federated Investors, Merrill Lynch and Putnam Investments, industry sources said.

Gaming industry bonds have been strong generally because of no new additions to room capacity, strong cash flow generation and reductions in leverage or company debt service burdens, Zarnett said.

However, it is unlikely casino bonds will be able to match their performance last year, he said, when investments in gaming industry bonds on the average returned investors almost 13 percent compared with a return of less than 3 percent on comparably rated Treasury issues.

Also by comparison, investments in gaming stocks included in the Dow Jones casino index gave investors an average return of just under 10 percent in 2002, compared with the Dow Jones industrial average, which fell 25 percent.

The bond market broadly was boosted through 2002 by tumbling interest rates, Applied Analysis spokesman Brian Gordon said. Because it is likely rates have dropped about as far as possible and will start increasing in 2003, the bond market's performance is expected to dim this year, he said.

Analysts said Station Casinos will probably be an industry leader this year, partially because the Las Vegas locals market frees it from the effects of Middle East hostilities and the sluggish national economy, and because of the planned opening of the Thunder Valley Casino in Northern California, which it will operate.

"Station has contracted to manage Thunder Valley for a 24 percent fee on the income from the property," Gordon said.

Nevertheless, Deutsche Bank this week downgraded Station bonds from "buy" to "hold" based on price.

While the bank is forecasting substantial leverage improvement by year's end, Zarnett said Station's is more likely than previously expected to start construction soon on a new casino project in Summerlin that could raise leverage.

Still, the depressed leisure travel industries and U.S. involvement in the Middle East are casting a pall over the gaming industry in general, analysts agree.

Gordon pointed in particular to the dramatic drop over the past year and a half in international visitors coming to Las Vegas. International travel is particularly sensitive to world events such as the hostilities in the Middle East, but there is a substantial lag between the two because international visitors book their travel six to 12 months in advance, he said.

Keith Schwer, director of the University of Nevada, Las Vegas' Center for Business and Economic Research, said the weak dollar likely will encourage foreign visitors to spend more in this country.

That effect, however, will likely be swamped by the cutbacks in air service from Asia, concerns about terrorism and fears about severe acute respiratory syndrome, he said.

Added causes of concern analysts cited included concerns about higher gaming and business taxes in Nevada and the prospects of tax increases elsewhere.

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