Expecting ’09 recovery for gaming? Don’t

This week, Moody’s Investors Service downgraded MGM Mirage’s $7.8 billion debt. Caustic stock forecaster Jim Cramer told his CNBC television audience to avoid investing with the gaming sector.

Now, Fitch Ratings has smacked the industry in a blistering report. The investors service said the nation’s casinos, coming off the worst year the industry ever suffered, won’t see any meaningful recovery until 2010.

Fitch analysts said gaming had its worst declines in the last four months of 2008. The operating trends are likely to remain weak throughout 2009.

"The global economy is experiencing a severe recession," Fitch analyst Michael Paladino wrote. "Fitch is forecasting the steepest gross domestic product decline in the major advanced economies since World War II."

The economy’s effect on the casino industry surprised many investors. Fitch estimated gaming revenues from commercial casinos and racinos declined 3.5 percent in 2008. The figure would have been worse if not for slot-machine expansion in Pennsylvania and New York.

Fitch believes consumer spending will continue to decrease. There will be fewer dollars left behind in slot machine hoppers and in gambling table drop boxes.

"Gaming spend per visit has been affected more than visitation levels," Paladino said.

Reduced revenues cut gaming company cash flow. That, combined with heavy debt, a lousy credit environment and liquidity issues, pushed seven gaming companies into default on almost $13.3 billion of high-yield loans last year. Harrah’s Entertainment had the largest figure, $9.7 billion. The default amount covered 32 percent of the gaming high yield in the market, well above the overall high yield default rate of 8.5 percent, Fitch reported.

On Tuesday, Station Casinos defaulted on $2.3 billion. However, the casino operator asked bondholders to support a prepackaged bankruptcy plan that would reduce the company’s debt in exchange for a combination of secured notes and cash.

Other gaming companies could face similar crises this year. Fitch said the industry won’t break out of its doldrums until the economy perks up.

But if unemployment rises even higher, consumer confidence will continue to weaken. As such, gaming revenues could be worse than a year ago.

Las Vegas and Atlantic City will continue to be challenged, Fitch predicted. But the ratings service foresees one bright spot; regional markets could benefit thanks to accessibility and value.

Howard Stutz’s Inside Gaming column appears Sundays. E-mail him at hstutz@reviewjournal.com or call 702-477-3871. He blogs at lvrj.com/blogs/stutz.