Fitch: Credit Risks in US Gaming Sector Becoming Less Palatable
Heightened credit risks for the US gaming sector remain and the industry is looking less palatable. Regional operators' FCFs, which seemed quite robust at the same time last year, are starting to look more fragile after weak 2014 trends, REIT spinoff announcements and a potentially imminent rise in short-term interest rates. Suppliers' leverage profiles are entering uncharted territory following the recent consolidation. Bright spots include the Las Vegas Strip and Macau, despite the latter's recent weakness.
We continue to hold that regional gaming is in a slow secular decline. However, in 2015 new competitive openings will be benign, the economic picture is brighter and comparisons to 2014 should be easy, providing some reprieve. Secular pressures include proliferation of alternative forms of gambling, potentially lower propensity to gamble among younger generations and baby boomers' lower readiness for retirement.
Following the most recent round of M&A, the supplier subsector carries an uncomfortable amount of debt. There are notable benefits of the mergers (cost synergies and increased diversification), but the subsector's ability to take on large amounts of debt is hindered by its already significant fixed costs, including the recurring investments in slot operations and lottery segments. Considering that the subsector is so technology driven, it requires substantial dry powder for acquisitions and R&D spending.
While recent operating headwinds in Macau are concerning, the long-term fundamentals for the higher-margin, lower-volatility mass business remain intact. Macau and the greater China market remain underpenetrated and we expect gaming revenue growth will be driven by new supply and infrastructure development. Slower but still solid GDP growth in China (6.8% in 2015 and 6.5% for 2016) will continue to anchor mass-market demand.
Today Fitch released "A Choppy Year for Gaming - Fitch's Views on Gaming in 2015." The report discusses in more detail why Fitch remains negative on regional gaming as well as points of caution with respect to gaming REITs and slot suppliers. Other pertinent points include FCF/leverage sensitivity analysis for regional operators, short-term interest rate sensitivity analysis, outlooks for major markets, impact of low oil on Lake Charles, Macau operators' dividends capacity through the downcycle, and regulatory developments in topical US jurisdictions.