GAMING COMPANIES ON THE BRINK? Cut the surprises, increase the chances
Loan defaults. Credit rating downgrades. Expansion projects on hold indefinitely. Private equity deals dead in their tracks. Gaming stocks trading at record lows while gas prices are at record highs. Smoking bans being implemented or discussed. Today's reality for casinos is surprising to believers of the old saw about gaming’s immunity to recession.
Surprise is also in play in the recent implosion of the financial markets. Despite the early warnings of a pending crisis, the hastily crafted bailout to revive credit markets emerged in an atmosphere of scrambling, panic and confusion. Solutions offered by Washington have not had an immediate positive impact on Wall Street. Only time will tell whether the bailout legislation was the ideal way to provide liquidity to the capital markets.
For now, gaming’s woes are linked inextricably to the economy’s overall poor performance. The key sectors influencing casino revenues and future expansion - real estate, hospitality, tourism and energy - all have been hit hard. Given these factors, casino operators, owners and developers have little ability to reverse the effects of the global economic downturn.
There are steps to take, however, to make the (temporary?) ride down a less bumpy.
Coping with tough times aheadWhen viewed against this backdrop, gaming companies can expect an increase in financial woes. Credit facilities will remain tight, cash flow will be restricted and more gaming bankruptcies and insolvencies are certainly a possibility.
Smaller, less diversified operations, such as some riverboats and racinos, are vulnerable to decreased local traffic, shrinking revenues and tighter access to capital. They are more likely to be the first casualties.
Large “market-to-market” balance sheet adjustments, such as the reported $600 million write-down of the Harrah’s investment by Apollo and TPG, will continue. Recently, Sheldon Adelson, whose assets include the Las Vegas Sands, Venetian and Palazzo on the Strip, dug $475 million deep into his family’s money to avoid breaking banking covenants. Undoubtedly, there will be additional incidents of big industry players struggling to refinance huge debt loads incurred when easy credit markets ruled in the very recent past. The search for capital will become increasingly challenging as the appetite for investment risk evaporates.
The credit and consumer spending crunches also will trickle down to casinos and their levels of services across the boards. As operating budgets tighten, staff reductions in labor-intensive gaming companies could well follow – a strategy that landed Columbia Sussex and the Atlantic City Tropicana in some very hot water with New Jersey regulators. Ancillary expansion projects, such as parking garages and auditoriums, likely will be pushed to the back burner. Maintenance deferrals could mean delaying such non-essentials as the replacement of a lobby’s worn rug, which then detracts from the facility’s attractiveness. In turn, customers begin to drift to the shinier place across the street, resulting in a further plummeting of revenues.
In this gloomy scenario, most observers are advocating patience. But while the industry lurches towards its hunker-in-the bunker phase, there is something that gaming owners can add to their patient perspective. The avoidance of surprises.
When casino owners see the early signs of a systemic problem, such as a change in their financial structure, they can avoid additional problems by informing their regulators immediately.
Recently, there’s been an unwelcome spotlight on regulatory authorities in other sectors. Many fingers pointed to the failure of adequate and preventive regulatory oversight as contributing to the current meltdown of financial institutions and Wall Street.
The gaming industry, as one of the most heavily regulated in the country, certainly will feel increased scrutiny and pressure from its regulatory agencies. There also will be increasing stress from political interests. Governments are facing fiscal constraints and budget shortfalls now that the taxes they counted on from local casinos, riverboats and racetracks are seen as falling short of the mark.
Clearly, both regulators and gaming companies face unprecedented challenges. As everyone in the gaming business is aware, there is one thing that regulators dislike more than anything else – surprises. Regulators can take bad news and always will appreciate a heads up that such news may be coming. But they loathe being the last to hear about a casino on their watch breaking a covenant, being unable to refinance bonds or filing for Chapter 11 protection. Nor do they like discovering that a promised new property has been mothballed, downsized or delayed. The lesson to be learned? Got a secret? Don’t keep it from the regulators.
Keeping regulators informed before a crisis reaches full-blown proportions is one thing in this environment that casinos can control. Changes in financial circumstances usually are known in advance. Bankruptcies just don’t appear overnight.
If a casino is in danger of violating a covenant or falling below dictated ratios, if credit terms are about to expire or if bonds cannot be financed, do yourself and your stakeholders a favor: immediately discuss it with the regulators before they read about it in the newspaper.
Be straight with the regulators and communicate honestly and frequently. Letting regulators know what to anticipate, and advising them of your plans for dealing with the problem, will help gaming companies forge a smoother path for what lies ahead – restructuring, turnaround or insolvency.
This kind of preventive, heads-up communication policy and practice also can help in relations with the regulators, should plans go awry. Gaming regulators all have a degree of flexibility to be able to waive certain requirements or grant a company extra time that can help owners dig themselves out of trouble spots. Additionally, “showing the flag” through personal appearances by top executives and finance advisors to each jurisdiction is time and money well-spent.
Another important way to get ahead of a looming crisis is to put together a team of turnaround, insolvency and/or bankruptcy advisors before your options narrow or disappear. It can make all the difference in how the crisis is handled or, better yet, avoided.
Casino bankruptcies are not run-of-the-mill Chapter 11 matters. It is important to work with professionals who are experienced in the unique aspects of casino insolvencies so the right steps are taken to mitigate risks.
Considerations at play in casino bankruptcies include the continuation of uninterrupted operations, the payment of gaming chips, tokens and sports book wagers, managing the tensions that arise between state gaming laws and bankruptcy laws, and the prevalence of litigation to determine the dischargeability of debts.
While gaming bankruptcies are a special breed, no two casino bankruptcies are alike.
Each insolvency has its own contributing factors and objectives. In some cases, creditors, such as bondholder groups, may force a company into Chapter 11. In other cases, a company itself may seek protection voluntarily, with the resulting “breather” period, while it renegotiates its debt. Still others may use bankruptcy as leverage to loosen restrictions with municipal landlords or partners.
Depending on what debtors are attempting to achieve, each casino bankruptcy will take its own form.
When the credit markets do open up again (and they will), don’t pop the champagne corks. Caution still should prevail. The gaming industry is not favored historically by those extending credit and casinos’ high-risk profile will make them a lower priority for the capital markets once the flow of financing opens again.
For private equity firms, companies with unexposed lines and others with cash on hand, there are opportunities to explore, and it looks likely more opportunities will proliferate as cash flow and capital remain impaired.
The good news is that most companies will survive this storm. And there will be a few, depending on their timely investments at or near the bottom of this current downturn, that will emerge stronger on the other side. Consider this the silver lining in the cloud covering the gaming industry - a shiny hope that is a welcome surprise to the terminal optimist in all of us.