By Dena Aubin - Analysis
NEW YORK (Reuters) - Some of the United States’ biggest casino operators are being pushed closer to default, debt restructuring or bankruptcy as the credit squeeze at gaming companies intensifies.
As the worst recession in decades keeps more gamblers at home, bonds of casino operators have priced in an ever gloomier scenario, effectively shutting casinos out of the high-yield debt markets.
Some MGM Mirage (MGM.N) bonds lost nearly half their value in the first three months of the year alone. Despite a rally this week on news MGM may sell some casinos, the company’s bonds were trading as low as 27 cents on the dollar on Tuesday, a signal the market sees high default risk.
Some Harrah’s bonds due in 2010 tumbled 40 percent in the first quarter to 44 cents on the dollar, though they have since bounced to 52 cents, according to MarketAxess.
“The most shocking development is the extreme pressure that both Harrah’s and MGM Mirage are under,” said Alan Feld, a Los Angeles attorney who has worked on casino-related restructurings. “Las Vegas has never been more deeply leveraged, particularly the two big casino operators.”
Gaming experts blame a combination of heavy debt and slumping revenues as the worst job market in 25 years forces consumers to tighten their belts. Lavish new projects that casinos planned in the boom years are sitting unfinished as lenders back away.
Casinos are also battling a cultural backlash, with politicians and the public angered by bonuses and deluxe trips at companies that are taking bailout funds from the government. Conference bookings to Las Vegas slid after President Barack Obama in February warned, “You can’t take a trip to Las Vegas or down to the Super Bowl on the taxpayers’ dime.”
“It just has never been this bad in the gaming market,” said Paul West, a Baton Rouge-based attorney who has worked on casino restructurings. Many casino companies will have only two options — renegotiating debt with creditors or restructuring it through bankruptcy court, he said.
Sales of some casino properties will likely be a part of debt restructurings but at current depressed prices, there is a limit to how much that will help, said Michael Paladino, a gaming analyst at Fitch Ratings.
“I don’t think that alone will be a way out,” he said.
Bankrupt Tropicana Entertainment TRPET.UL, which has been trying to unload its Atlantic City casino, last year planned on fetching at least $950 million for the property. It drew a $700 million bid from real estate developer Cordish Co but that deal fell apart as the economic slump worsened.
Some companies are winning breathing room. MGM’s shares and bonds are rallying amid reports of a potential investment from private equity firm Colony Capital, as well as reports of possible casino sales.
Harrah’s Entertainment may push out some of its near-term debt maturities with a debt exchange now underway. Its liquidity is adequate for now but is weakening as the company burns cash, according to Moody’s Investors Service.
Pain for bondholders will likely continue. More debt holders will likely take losses in so-called distressed debt exchanges, where companies extinguish old debt at a significant discount by swapping it for new bonds.
Including distressed debt exchanges, missed interest payments and bankruptcies, a record 32 percent of casino junk bonds defaulted last year, affecting $13.3 billion of debt, and that number could grow, according to Fitch.
Station Casinos STN.UL has warned it could file for bankruptcy protection by April 15 if it does not reach a deal with lenders and noteholders to restructure its debt.
Gaming companies also face billions of dollars in bank lines coming due over the next two years, and even before then, falling revenues will put many at risk of violating covenants, or lending terms.
“A lot of the bigger issuers in the space will keep the default level high in 2009,” said Fitch’s Paladino.
Reporting by Dena Aubin, Editing by Chizu Nomiyama