NEW YORK--()--Financial policies in the gaming and lodging sector are increasingly focused on maximizing shareholder value, likely a result of the changes the "fiscal cliff" would have on dividend tax treatment, as well as lackluster organic growth prospects due to mixed broader economic trends, according to Fitch Ratings.
In addition to companies increasing dividends and share repurchase, event risk is rising, as the cost of debt remains extremely cheap relative to historical levels. We note that mergers and acquisitions activity is increasing and we expect that will continue, given the interest rate environment, improved balance sheets of certain companies, and a soft economic outlook. In addition, real estate heavy industries including gaming, lodging, corrections and several others are looking to execute transactions to maximize real estate value.
Companies (e.g. Penn, Gaylord, Corrections Corp.) are exploring REIT structures as the IRS seems to be taking a fairly liberal view on the topic. The tax savings resulting from a REIT structure is a material, permanent benefit of executing such a transaction. However, the increased shareholder value potentially gained through multiple arbitrage beyond the present value of those tax savings may be temporary in nature, as the arbitrage opportunity reflects the current market environment. Tangentially, other types of real estate related transactions may ensue in this sector if real estate values become more transparent.
Early this month, Atlantic City will report November revenues, which we expect will be extremely weak, given the effects of Hurricane Sandy. We previously noted the damage to regional infrastructure was a far worse consideration than physical damage to casinos, which resulted in weak demand during November. Dip in demand will have a material impact on fourth quarter performance.
Revel Entertainment's (unrated) debt continues to trade at very weak levels, and we recently downgraded Borgata's issuer default rating one notch to 'B-' from 'B'. The Borgata downgrade took into account uncertainty surrounding ramifications of the storm, although we do not believe that any impact from the storm will persist long term. A larger driver of the downgrade was our continued concern regarding the competitive landscape facing the Atlantic City market, including gaming expansion legislation passed in Maryland and varying proposals for the last remaining Philadelphia license.
Additional information can be found in Fitch's 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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