At expo, talk of leaner times replaces bombast

For the past several years, the convention where the gambling world's latest and greatest bells and whistles are unveiled has been full of managerial bravado and bluster.

Not this year.

The three-day event, which wrapped up Thursday at the Las Vegas Convention Center, sounded more like a group-therapy session. Amid the economic downturn of a lifetime, it was a chance for industry leaders to commiserate.

Surrounded by peers and encouraged to talk about their troubles, executives sounded humbled, even introspective as they talked about strategies for surviving this down economy.

"Gone are the days when you could put up story boards and get (a project) financed," said MGM Mirage Chief Financial Officer Dan D'Arrigo, whose company is still seeking more than $1 billion to complete CityCenter, a massive resort complex opening next year on the Strip. In the future, he said, lenders will want a detailed cost analysis of "every nut, bolt and screw."

There were light moments during the conference, but the jokes tended to mask painful truths.

When someone referred to MGM Mirage as a large cap company, D'Arrigo added, "used to be."

When Penn National Gaming received kudos for having one of the healthiest balance sheets in the industry, the racetrack casino company's chief financial officer, Bill Clifford, admitted that he had tried his best to go in the opposite direction by pursuing a leveraged buyout that was called off amid the banking crisis.

"We tried to be one of the highly leveraged companies" and failed, Clifford said.

Like gamblers gorging at a cheap buffet, gaming companies loaded up on loans for new projects or buyouts. They're now paying the price as earnings plummet, leaving less money to make interest payments and even less for upkeep.

Most companies will likely restructure their debts outside of bankruptcy court, but there's more heartburn on the horizon. Casino stocks have lost 80 to 90 percent of their value over the past year. The market value of these companies is billions less than their properties are worth, signaling just how little faith investors have that these companies can ultimately pay down their debts before they drown in them.

Executives at the show said the industry will emerge from this downturn forever chastened. Harrah's Entertainment Chief Executive Officer Gary Loveman said gaming companies spent money "like drunken sailors" when capital was plentiful and predicted a "sea change" in the way casino companies are structured going forward.

Gaming companies that traditionally had four to six times as much debt to earnings, fattened up on loans that are now seven to 10 times their earnings. That's leverage that isn't sustainable and would result in heavy losses or bankruptcy if not reduced, executives said.

In recent days, Harrah's has repurchased some of the company's bonds at 40 cents on the dollar, Wynn Resorts and Las Vegas Sands have raised billions in cash by issuing stock and MGM Mirage raised $750 million in bonds.

Companies will use similar methods in the future to seek cash or pay down debt as an alternative to seeking financing from banks, which are tightening the spigot or likely to impose terms that are unworkable, executives said.

D'Arrigo said MGM Mirage passed on the chance to boost leverage further with loans collateralized by mortgages on the company's hotels, as Harrah's and Station Casinos did — a strategy that is now working against these companies.

"We had a lot of board members shaking their heads" at these moves, he said. These companies' leverage has only worsened with the recession, he said.

It's only with great difficulty that MGM Mirage managed to raise more than

$2.5 billion for CityCenter and other needs in recent months, a "brutal" process, D'Arrigo said.

It's the worst financing market "in our lifetimes" and it's not going to get easier "anytime soon," he added.

D'Arrigo predicted a hiatus in new development on the Strip for the next five to seven years and a lot fewer projects getting built after that as financing costs rise.

"It's going to be a whole different ballgame," he said.

As casino bosses hunker down for the fight of their lives, opportunists lurk in the wings, looking to profit from the troubles of others.

Insiders predicted that casino spin-offs from distressed companies and even some alternative business models, such as gaming companies that simply manage properties for a fee instead of owning them — a less risky and cheaper way to make money.

A sell-off may inject new blood and ideas into the industry, spurring investment in older, more tired properties and boosting competition, Goldman Sachs analyst Marc Falcone said at the conference.

"This is a chance to split up some assets and put them into the hands of the right people," he said. "Bigger will not necessarily be better in this business."

For all of the humility on display, there also was some defensiveness among the executive set.

Their comments signaled a belief that the gaming business — unlike automakers or even the airline industry, which have suffered permanent damage — will rebound as forcefully as it headed into earnings free fall.

And indeed, there were glimmers of hope. Despite the downturn, the exhibit space was larger than in the past and featured more than 750 vendors, a few more booths than last year. Even as consumers are spending less, the industry continues growing, with more and bigger properties.

"We're going to work our way out of this cycle," D'Arrigo said.

And when that happens, Clifford predicted, companies "won't make the same mistake again."