Still No Easy Answers on Casino Debt Levels

In today’s Green Felt Journal I take another shot at the issue of casino debt. This isn’t a new issue, but it’s one that’s become newsworthy again recently thanks to Moody Investor Services analyst Peggy Holloway’s report, whose title (“A More Cautious Consumer Steps Away from the Casino,” tells you all you need to know about its tenor. She singled out Caesars Entertainment and MGM Resorts International’s CityCenter as two entities at particular risk for their “highly leveraged capital structures.” In non-analyst speak, that means “companies that have excessive levels of debt.”

I spoke to Eugene Christiansen, CEO of Christian Capital Associates (with whom I co-authored an academic article on the subject) about his latest impressions on the debt situation. My e-mail to Jeremy Aguero, principal analyst with Las Vegas-based Applied Analysis, and an economist who has been in Las Vegas since his 1996 graduation from UNLV, wasn’t answered in time to make the print edition, but I thought that his insights deserve to shared.

It’s clear that there’s a point at which debt levels become toxic. What isn’t exactly clear, however, is how far major Las Vegas casino operators are from that point. And it’s a difficult question to answer. Obviously casino operators have a vested interest in telling you that everything is fine. On the other hand, they’ve got access to better information than anyone else, and they are the ones who will be sitting on the ground floor if the debt skyscraper comes crashing down.

Here are my questions to Aguero:

1. Is Holloway correct in stating that the levels of debt in the gaming industry are a cause for concern? Why or why not?

Debt loads are less of an issue today because of the number of financial restructurings that have already occurred. Additionally, many operators that have avoided bankruptcy have done an excellent job of pushing out maturities for medium and long-term debt. That said, long-term debt remains high in comparison to revenue. While total debt is $3.0 billion off its 2009 peak, you’ll notice that operators’ interest expense has continue to rise (this is the analysis we first did when we noted the debt as an issue for the industry in 2008/09).

  2011 Percentage 2009 Percentage 2001 Percentage
Long-Term Debt $23,067,059,050 118.4% $26,078,220,748 135.8% $8,926,454,913 59.6%
Interest Expense $2,892,762,865 14.8% $2,579,710,778 13.4% $1,275,093,015 8.5%
Total Revenue $19,488,973,899 100.0% $19,203,942,713 100.0% $14,968,957,375 100.0%

2. What is a healthy level of debt (generally speaking) for a gaming operator?

This is a somewhat subjective question, and I am not sure I can provide a single answer (it is different for different operators). I would suggest, however, that a long-term debt load (i.e., as a percentage of revenue) closer to 2001 levels would be preferable to those exceeding 100 percent of the sector’s annual gross revenues.