Fitch Ratings still skeptical about regional gaming recovery

28 September 2015

(PRESS RELEASE) -- Investors should view the recovery in the year-to-date gaming across regional markets with caution, according to Fitch Ratings.

We believe that regional gaming remains secularly challenged and long-term growth will largely be flat and possibly slightly negative despite the 2.2% gaming revenue growth year-to-date through July. Secular challenges include millennials' lower propensity to gamble, baby boomers' less certain retirement prospects, less robust growth in median wages, and a proliferation of gambling alternatives.

Easy year-over-year comparisons along with more affordable gas prices are masking these secular headwinds. Looking at more static states in terms of supply (PA, MI, MS, IA, and MO) gaming revenues are up 3.2% year-to-date through July over 2014 same-period revenues but are down 0.7% relative to the 2013 same-period revenues. The decline relative to 2013 would likely be steeper if not for the lower gasoline prices, which declined by about one-third in the first-half 2015 relative to first-half 2014 and full-year 2013 prices. (Gasoline makes up 3%-4% of personal consumption spending.)

Positive U.S. economic indicators are encouraging despite our longer term cautious view. The improving indicators, should they be sustained, will support the credit profiles of regional gaming issuers given their relatively healthy operator balance sheets and free cash flows (FCFs). Gaming operators continue to sound optimistic on their earnings calls saying that the consumer is looking stronger and are finding further efficiencies resulting in solid EBITDA flowthroughs.

However, another downturn could be especially problematic for operating companies that sold or spun off their assets and now are obligated to make lease payments for right to operate these assets. The lease payments taken together with maintenance capex increase these companies' operating leverage, making their FCF especially susceptible to operating pressure.

Slot suppliers are more of a focus versus operators given the former's more acute exposure to regional secular pressures relative to the operators and, in some instances, higher leverage. Still, we believe slot suppliers' positive FCFs, good liquidity, and increased diversification should keep defaults at bay, at least in the near-to-medium term.

Additional information can be found in Fitch Ratings' Gaming, Lodging, and Leisure (GLL) electronic newsletter including brief sector comments, recent/upcoming events, and links/summaries to rating actions and detailed reports. Links to GLL-related reports/comments from other Fitch groups including Leveraged Finance, Credit Market Research, REITs, Public Finance, and Structured Finance can be found there.

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