Gaming industry in precarious financial position, Moody’s says

UNITED STATES Reduction in consumer spending on gambling could undermine the recent modest improvement in the U.S. gaming industry and ultimately lead to rating downgrades, and a growing sense that the economic recovery is slowing could prompt such a pullback, according to a new report from Moody’s Investors Service.

“We are concerned that consumers’ propensity to spend on gaming activities will not withstand another hit to their wallets—even a small one,” says Keith Foley, a Moody’s senior vice president. “Unfortunately, an extended period of consumer weariness—or any economic event that hurts consumer demand for gaming—could have a material negative effect on company earnings and lead to some downgrades.”

Most vulnerable to a pullback in consumer spending on gambling in the U.S. would be highly levered gaming companies with low ratings, Moody’s says. About a third of the 50 U.S. gaming companies rated by Moody’s have corporate family ratings of Caa1 or below, and more than a majority—about 54%–have corporate family ratings of B3 or below. Many of these companies have been counting on the economic recovery to grow them out of capital structure issues such as high leverage and large debt maturities.

“Any blip on the road to recovery could force many to go back to lenders for covenant relief or possibly a renegotiation of their existing debt obligations,” Foley says.

Companies Moody’s perceives as reliant on continued economic improvement include Caesars Entertainment Corp. (Caa2) and MGM Resorts International (B3). While these and other companies—including Boyd Gaming Corp. (B2), Isle of Capri Casinos Inc. (B2) and Pinnacle Entertainment Inc. (B2)—have lowered their expenses and created breathing room in their covenants and debt maturity schedules, they are still considered highly leveraged and have company-specific, near-term issues that could be exacerbated if consumers curb their gambling budgets.

Best positioned to weather a retreat in gaming spending would be companies that have either expanded operations into high-growth overseas markets, such as Las Vegas Sands Corp. (Ba3) and Wynn Resorts Ltd. (Ba3), or are highly and effectively diversified across the United States, such as Penn National Gaming Inc., Moody’s says.