No End to Casinos' Hot Streak


From Standard & Poor's The U.S. gaming industry is expected to perform well in 2006, fueled by continued growth in consumer spending, despite pressure related to higher interest rates and energy costs. However, we expect the economy to expand somewhat more slowly in 2006 than '05: On average, gaming companies will generate revenue growth in the mid single digits.

Our longer-term view, with regard to industry fundamentals, remains positive. Gaming companies benefit from a number of established advantages, such as favorable demographic trends in the U.S., an expected continued rise in leisure travel and activities, and regulatory limitations that help to keep overall supply growth in check.

REVENUE BY MARKET. We expect 2006 market growth to generally align with 2005 performance. A major factor underlying this belief is the lack of overall supply growth, which will help to offset the expected modestly slower economic growth during the latter part of the year.

The table below depicts gaming-revenue growth in several major markets based on available year-to-date information for 2005:

U.S. Gaming Revenue

Gaming market

Period

Gaming revenue (Mil. $)

Growth over same prior-year period (%)

Las Vegas*

Jan. 1, 2005 - Sept. 30, 2005

5,606

10.6

Atlantic City

Jan. 1, 2005 - Oct. 31, 2005

4,232

3.9

Illinois

Jan. 1, 2005 - Sept. 30, 2005

1,349

4.7

Indiana

Jan. 1, 2005 - Sept. 30, 2005

1,831

2.0

Iowa

Jan. 1, 2005 - Oct. 31, 2005

929

4.7

Mississippi River Counties(a)

Jan. 1, 2005 - Sept. 30, 2005

1,182

(1.9)

Bossier/Shreveport, LA

Jan. 1, 2005 - Oct. 31, 2005

669

(4.4)

Detroit

Jan. 1, 2005 - Oct. 31, 2005

1,024

2.4

*Includes the Strip, downtown, and Boulder Strip.

(a)Excludes Gulf Coast.

Data: State Gaming Web sites

When looking at specific markets, we expect Las Vegas to once again lead the industry due to the combination of continued popularity among vacation travelers and further penetration into the trade-show and convention markets.

In Atlantic City, we expect the Borgata's lead in the market to increase with the mid-2006 completion of the first phase of its master-planned expansion. In 2007, additional hotel rooms and other non-gaming amenities will follow. We believe that with completion of other expansions during this period, the market will absorb the Borgata project and continue its steady performance, even with slot machines likely coming on line in Pennsylvania during 2007. Similarly, most major riverboat markets should experience good results given their local customer focus.

More Consolidation?

Standard & Poor's expects consolidation to remain a factor in the industry during 2006 because the same regulatory restrictions that discourage new entrants also limit domestic opportunities for existing casino operators. Although some companies have managed to expand outside of the U.S., these opportunities are rare and highly sought after, and thus spark intense competition.

Since many rated gaming issuers are public companies, fewer growth opportunities will likely continue to spur consolidation. Moreover, scale has proven a sizable competitive advantage in the industry as it pertains to marketing, management depth, and the ability to access the capital markets. During the past two years, several major acquisitions have occurred in the industry (see list below), and we expect the announcement of more in 2006:

Major Acquisitions

Acquired company

Acquiring company

Date closed

Argosy Gaming

Penn National Gaming

Oct. 3, 2005

Caesars Entertainment

Harrah's Entertainment

June 13, 2005

Mandalay Resort Group

MGM MIRAGE

April 25, 2005

Coast Hotels & Casinos

Boyd Gaming

July 1, 2004

Horseshoe Gaming

Harrah's Entertainment

June 1, 2004

Ratings held steady following the announcements of four of the five transactions highlighted above. The only downgrade stemmed from MGM Mirage's (MGM) acquisition of Mandalay Resort Group and was due to the size of the transaction, which was fully funded with debt. In arriving at rating conclusions following acquisition announcements, we will continue to consider the strategic benefits of these deals, our intermediate-term outlook for the operating environment, and management's commitment and ability to reduce leverage within 12 to 24 months following the closing of any transaction.

Outside the U.S.

While opportunity may not abound, international growth, particularly in Asia, should remain of interest to the industry given the potential return on investment. Las Vegas Sands (LVS) experienced a spectacular return following the opening of the Sands Macau in May, 2004.

And it's not alone. Galaxy Casino Co. and Wynn Resorts (WYNN) are both expected to open facilities in the area in mid- and late-2006, respectively. These facilities are likely to be of high enough quality to slow the growth rate of revenue for the Sands Macau as the year progresses.

BRITAIN INFERTILE. Interest in Asia has been evidenced by the 20-plus companies that expressed interest in being considered for two potential resort opportunities in Singapore, both of which may be awarded during 2006. Harrah's Entertainment, Wynn Resorts, Las Vegas Sands, and MGM Mirage counted among the eight consortiums that recently purchased Singapore's opening casino tender -- the documents that outline the requirements for the Marina Bay casino site. The tender for the other casino site, on Sentosa Island, will come up for sale early next year.

A few years ago gaming operators looked to Britain as the next major growth market. However, opportunities have not panned out there in any meaningful way, and we don't expect that to change in 2006. Rather, companies likely will continue to seek unique opportunities such as the recently announced partnership of Harrah's (HET), Starwood Hotels & Resorts Worldwide (HOT), and Baha Mar Development in an approximately $1.6 billion casino resort complex in Nassau, Bahamas.

In pursuing international expansion, a number of gaming companies have chosen to establish joint ventures, frequently with local partners. We believe these arrangements often make sense as the local partners typically have substantially better insight into area business practices and cultural matters. In addition, this structure spreads development risk among multiple parties.

Although frequently financed on a non-recourse basis, however, these joint ventures are typically not simply stand-alone financial investments. Rather, the projects often rely on the brand and gaming expertise of the U.S. partner, who usually exercises a meaningful level of management control. When determining how much project risk should be attributed to the parent, we consider these investments on a case-by-case basis, with strategic importance weighing heavily in our analysis.

The Latest in Vegas

As usual, the largest gaming market in the U.S. is seeing no shortage of activity. Although only two new mega-resorts opened on the Strip between 2000 and 2005 -- Aladdin and Wynn Las Vegas -- several projects in various stages of development are on the drawing board for the next five years, and these could further reshape the market. (Note: While no new mega-resorts opened from 2000 to 2005, several sizable property expansions have occurred at the Venetian, Bellagio, Mandalay Bay, and Caesars Palace.)

However, high-end residential units make up a significant component of many of these projects, both as an absolute number of units and as a funding source to partially offset development costs. While residential development and returns in Las Vegas have stayed solid over the past several years, some projects face jeopardy if the market slows down due to a weaker economy and a cutback in consumer spending. The following table outlines several of the larger projects planned for the market:

Property Name

Expected completion

Estimated cost (Mil. $)

Condo-hotel units

Hotel rooms

Palazzo (Las Vegas Sands Corp.)

Mid-2007

$1,600

-

3,025

The Grand Hyatt Las Vegas Resort at the Cosmopolitan Private ownership)

Early 2008

$1,500

1,700

1,000

Fontainebleu (Private ownership)

2008

$1,500

-

4,000

Encore at Wynn Las Vegas (Wynn Resorts Ltd.)

2008

Uncertain

-

2,000

Las Ramblas* (Private ownership)

2008

$3,000

NA

NA

W Las Vegas Hotel Casino & Residences (Private ownership)

2008

$1,700

2,000

2,000

Project CityCenter-Phase I (MGM Mirage)

2009

$5,000

1,650

5,200

*It is estimated that Las Ramblas will contain 4,400 lodging units. However, the breakdown between hotel rooms and residential is uncertain.

Source: Las Vegas Convention & Visitors Authority.

While Las Vegas has no new property openings on its slate for 2006, several expansions are expected to be completed, including ones at the Palms, the Aladdin, and the San Remo Casino & Resort.

HOOTERS NICHE. The Aladdin will complete its makeover into the Planet Hollywood Resort & Casino with the intention of repositioning it to target a Palms and Hard Rock customer base. While a fresh image will help, the property still carries a substantial debt burden and will likely find establishing itself a challenge despite its good center-Strip location.

Conversely, the San Remo's introduction of the Hooters Hotel Casino to the market will likely enjoy good customer demand given its middle-market focus, a segment we think the market underserves.

Gulf Coast

The Mississippi Gulf Coast is also expected to experience a significant amount of activity during 2006, although this activity will revolve around rebuilding efforts by market operators following the destruction caused by Hurricane Katrina. While the future competitive landscape will likely remain uncertain throughout most of 2006, rebuilding efforts by many existing operators will probably progress.

Looking ahead, we would expect new properties to begin to reopen in 2007 or '08. We also believe the market will gradually recover its pre-hurricane level of gaming revenue -- given the good market demographics and quality of the assets that will likely be reconstructed.

Native American Gaming

In our opinion, the positive momentum experienced by Native American gaming operations over the past several years will likely continue throughout 2006 as many of these operations benefit from monopolies and/or limited direct competition.

In addition, several properties, including Foxwoods (Mashantucket Wester Pequot Tribe), Valley View Casino (San Pasqual Casino Development Group), Chukchansi Gold Resort & Casino (Chukchansi Economic Development Authority), and Paragon Casino Resort (Tunica-Biloxi Gaming Authority), will be in the midst of expansion projects during the year, which will better position them to drive increased customer demand in the intermediate term.

Ratings Wrap-Up

With the operating environment in the sector expected to remain relatively healthy for the next several quarters, favorable rating actions or outlook revisions are likely during the period.

This expectation differs from that of 2005, which reaped a somewhat equal number of positive and negative rating actions. While improved credit profiles benefited from good earnings growth, negative actions came about because of continued M&A activity, expansion announcements, and higher debt leverage than previously expected, among other factors.

However, the positive operating momentum and favorable interest-rate environment resulted in 11 new ratings assigned, approximately 50% of which consisted of Native American gaming operations.

UPPED RATINGS IN THE CARDS? The positive operating momentum should serve as a catalyst for positive rating actions during the next several quarters. However, companies will also need to demonstrate their ability and willingness to maintain credit measures in line with higher ratings on an ongoing basis, despite the expected continuation of industry consolidation.

Over the long term, the increased scale of issuers, combined with the characteristics of the industry (including the stability of cash flows, and its highly regulated nature) could lead to higher ratings, including an increased number of investment-grade names.

Company

Corporate Credit Rating

Outlook/CreditWatch

International Game Technology (IGT)

BBB

Stable

GTECH Holdings (GTK)

BBB

Watch Neg

Seminole Tribe of Florida

BBB-

Positive

Harrah's Entertainment (HET)

BBB-

Stable

Mashantucket Western Pequot Tribe

BBB-

Negative

United Auburn Indian Community

BB+

Stable

Station Casinos (STN)

BB

Positive

Boyd Gaming (BYD)

BB

Positive

MGM Mirage (MGM)

BB

Stable

Chumash Casino & Resort Enterprise

BB

Stable

Ameristar Casinos (ASCA)

BB

Stable

Scientific Games (SGMS)

BB

Stable

Choctaw Resort Development Enterprise

BB

Stable

Mohegan Tribal Gaming Authority

BB

Stable

Aztar (AZR)TD>

BB

Stable

Penn National Gaming (PENN)

BB-

Positive

Seneca Gaming

BB-

Positive

Turning Stone Casino Resort Enterprise

BB-

Stable

Las Vegas Sands (LVS)

BB-

Stable

Chukchansi Economic Development Authority

BB-

Stable

Grand Traverse Band of Ottawa and Chippewa Indians

BB-

Stable

Kerzner International (KZL)

BB-

Stable

Isle of Capri Casinos (ISLE)

BB-

Watch Neg

Waterford Gaming LLC

B+

Positive

River Rock Entertainment Authority

B+

Positive

Pinnacle Entertainment (PNK)

B+

Stable

American Casino & Entertainment Properties

B+

Positive

Wynn Resorts (WYNN)

B+

Stable

Herbst Gaming

B+

Stable

MTR Gaming Group

B+

Stable

Wheeling Island Gaming

B+

Stable

Isle of Capri Black Hawk LLC

B+

Stable

San Pasqual Casino Dev Group

B+

Stable

Tunica-Biloxi Gaming Authority

B+

Stable

CCM Merger

B+

Stable

UTGR

B+

Stable

Majestic Star Casino

B+

Watch Neg

Alliance Gaming (AGI)

B+

Watch Neg

Hard Rock Hotel

B+

Watch Neg

Washington County Casino Resorts

B

Positive

Trump Entertainment Resorts Holdings (TRMP)

B

Stable

Inn of the Mountain Gods Resort & Casino

B

Watch Neg

Resorts International Hotel & Casino

B

Stable

Jacobs Entertainment

B

Stable

Riviera Holdings (RIV)

B

Stable

Eldorado Resorts LLC

B

Stable

Circus and Eldorado Joint Venture

B

Stable

Progressive Gaming International

B

Stable

Poster Financial Group

B

Stable

Resorts International Holdings LLC

B

Negative

Peninsula Gaming LLC

B

Stable

Greektown Casino LLC

B

Negative

Little Traverse Bay Band of Odawa Indians

B

Negative

CasaBlanca Resorts

B

Negative

OpBiz LLC

B-

Stable

155 East Tropicana LLC

B-

Stable

Premier Entertainment Biloxi LLC

B-

Watch Neg

Standard & Poor's credit analysts Craig Parmelee, CFA, and Michael Scerbo contributed to this report


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