This article first appeared in the St. Louis Beacon, Jan. 19, 2009 - Forget the outdated notion that the casino gambling business is recession-resistant. The debt-drenched industry is so weakened that credit-rating agencies say any chance of a turnaround won't come until late 2009 or early 2010.
Each of the four publicly traded companies owning Missouri casinos suffered stock price declines of 60 percent or more for the 12 months ended Jan. 15. The S&P 500-stock index was down 39 percent.
Most Missouri casinos are exhibiting the same trends as casinos in Las Vegas and Atlantic City with declining visits and shrinking consumer spending.
"Missouri is not too different from the rest of the country," says Martha LeMond, chief financial analyst for the Missouri Gaming Commission. "It all depends on disposable income."
Industry-wide woes are due to the recession, tight credit and aggressive expansion in recent years fueled by heavy borrowing. Moody's Investors Service also cites smoking bans in several states as contributing to revenue loss.
Moody's lists 17 companies as having a high probability of default on debt obligations. Of 56 gambling companies it rates, only three have investment grade ratings -- one tribal operation and two providers of equipment and services.
"People are holding back," says Keith Foley, a senior vice president at Moody's, who follows the gambling industry. "I don't know if there will be a permanent shift in spending."
The corporate casino business -- which excludes Native American gambling operations and suppliers of gambling equipment and services -- gets a negative rating from Fitch Ratings not only for current operating trends but also for its credit outlook.
"The overall headwinds of the economy are very great," says Fitch analyst Michael Paladino. Nationwide, "visitations are off and spending per visit is off even greater."
CHANGING ENVIRONMENT
There really was a time when the casino business could absorb the impact of a recession -- but that was in the early 1990s when the industry was smaller and when Las Vegas and Atlantic City were essentially the only choices. It was a $9 billion industry then, but it's a $62 billion industry now, Paladino says.
As the industry put a greater emphasis on food, beverages, retail outlets and entertainment, it also became more sensitive to economic changes and consumers' spending habits, Paladino says. Increasing competition also puts pressure on individual casinos.
Paladino suggests that regional and local casinos throughout the U.S. might fare a bit better -- or rather less worse -- than casinos in Las Vegas.
He bases his prediction in part on a drop in gasoline prices, encouraging people to visit regional casinos. Meanwhile, Las Vegas is getting hit by a reduced demand from foreign gamblers and by airlines cutting back on flights to the gambling capital.
"The removal of the loss limit will help in Missouri," says Paladino, referring to the passage of Proposition A that eliminated the $500 limit that a gambler could lose during any two-hour period at the same casino.
Proposition A "will probably help," says Foley, of Moody's. "But I would not expect a material improvement. Removing the loss limit doesn't mean that people will spend more."
UNHAPPY RETURNS
The economic decline has produced unsettling results. For the July-December period, admissions were down at 10 of of the state's 11 casinos versus the same period in 2007, according to the Missouri Gaming Commission. (Lumiere Place in St. Louis opened in December 2007.)
The biggest drop -- 58 percent -- was at the President, which closed temporarily twice last year due to flooding. The Ameristar casino in St. Charles was down 1 percent, and Harrah's in Maryland Heights was off 8 percent. The Argosy casino in the Kansas city suburb of Riverside was up 3 percent.
Adjusted gross receipts -- how much casinos took in minus what they paid out to customers -- was down or flat at nine Missouri casinos during the second half of 2008 compared to the same period in 2007.
The President was down 60 percent; Harrah's-Maryland Heights was off 5 percent; and Ameristar-St. Charles broke even. The Argosy-Riverside casino was up 4 percent and a casino in LaGrange was up 9 percent.
The weak numbers also stir speculation about whether the St. Louis market might be saturated. There are mixed views about a region that supports four casinos in the city and St. Louis County, two in Metro East and one more -- River City -- set to open in early 2010 in south St. Louis County.
"There's probably room for growth," says LeMond of the Missouri Gaming Commission.
But a December report by the independent financial research firm Morningstar raised question about the St. Louis market's effect on Pinnacle Entertainment, which owns the President and Lumiere Place and is building River City. "If demand doesn't materialize, return on investment could suffer," Morningstar said.
"I don't think River City will cannibalize (revenue at) Lumiere Place," says Fitch Ratings analyst Paladino.
Moody's analyst Foley isn't sure if the St. Louis area has too many casinos chasing after too few customers and dollars. "The poor economy could be overshadowing whether the market is saturated," he says.
NEAR DEBT EXPERIENCES
Two companies operating Missouri casinos are under serious financial pressure -- Herbst Gaming and Harrah's Entertainment. Both are private and both are based in Las Vegas.
Herbst Gaming told the Securities and Exchange Commission on Dec. 4 that it had so far failed to restructure debt and that it had failed to make an interest payment of $5.1 million that was due on Dec. 1. The next deadline for a restructuring agreement is Feb. 2.
If Herbst can't renegotiate a payment schedule, its lenders can call for an accelerated payment of some $847 million. By failing to make timely interest payments on other debt, Herbst is in default, which could force the prompt payment of another $330 million.
Herbst also warned, in a Nov. 14 filing with the SEC, that if it can't restructure its debt payments, it would "likely" file for a bankruptcy reorganization.
Despite the parent's woes, however, the Missouri Gaming Commission on Jan. 14 unanimously supported license renewals for its Terrible's Mark Twain Casino & RV Park in LaGrange and Terrible's St. Jo Frontier Casino in St. Joseph.
Harrah's gets a negative ratings outlook and a high default-risk rating from Moody's. In December, Harrah's gained a little breathing room via a complex debt-restructuring that enabled it to reduce some debt and to delay maturity dates for some bonds. In addition to the Maryland Heights casino, Harrah's owns a casino in North Kansas City.
STOCKS ROCKED
Among the publicly traded casino companies doing business in Missouri, Isle of Capri Casinos, based in Creve Coeur, had the worst stock performance over the last 12 months, falling by 72 percent. Its Missouri casinos are in Boonville, Caruthersville and Kansas City.
Last month, Morningstar warned that the company "is nearly tapped out" in terms of available credit. "A breach of a debt covenant remains a possibility," Morningstar said. "With competition intensifying and consumers tightening their belts, Capri is facing dire prospects."
It didn't help that four of its casinos were forced to close temporarily due to hurricanes and that two casinos closed temporarily due to Mississippi River flooding last year.
"In light of the current economic uncertainty, the state of the capital markets, and our financial position we will not undertake any new significant capital projects...until we have seen sustained signs of economic improvement," the company said in early December.
The company's Iowa and Missouri casinos "have held up relatively well," the company said.
Ameristar Casinos, based in Las Vegas, suffered a 63-percent stock decline in the last 12 months. It operates casinos in St. Charles and Kansas City.
It recently earned an underperform rating from Merrill Lynch, which warns that a debt payment of $1.4 billion comes due in late 2010, "one of the largest and earliest maturities in our universe."
The good news is that its Kansas City casino won't face new competition immediately because of a delay in approving a casino in Kansas' Wyandotte County.
The bad news is that "St. Louis remains a risk" when the competing River City casino opens in early 2010. "But its location is less likely to impact St. Charles than (will) Lumiere Place," the report said.
The number of buy ratings (nine) still outnumber the total of hold and sell ratings (seven) for Ameristar among equity analysts, says Thomson Reuters. By contrast, Isle of Capri has two buy ratings and nine neutral ratings.
A slightly better picture emerges for Penn National Gaming, a Pennsylvania-based company with casinos near Kansas City and in Alton, Ill. (The Casino Queen, in East St. Louis, Ill. is privately owned.)
"Penn National is in the best liquidity position" of casinos companies operating in Missouri, says Paladino of Fitch Ratings, even though the stock fell 61 percent during the last 12 months.
An equity analyst for SMH Capital recently cut his rating to hold from buy because the stock had jumped 50 percent from late November to early January. The stock had gained too much in relation to his financial projections. Analysts have 10 buy ratings versus four neutral ratings.
The biggest catalyst in St. Louis for at least the next two years should be Pinnacle Entertainment, whose stock lost 60 percent over the past 12 months.
Based in Las Vegas, it is betting heavily on the Lumiere Place and River City casinos; and the results will determine the impact of the economy and credit markets on casino expansion and how well the market can absorb more competition.
Most analysts like the company's chances. Thirteen have buy ratings while five have hold or sell ratings. But some warn that the state of the economy requires caution. "Any delays or unforeseen costs (for River City) could quickly undermine Pinnacle's financial health," Morningstar said.
Robert W. Steyer is a freelance business journalist in New York.