Fitch: State-Level Online Gaming Momentum Continues

NEW YORK--()--The rollout of state-level online gaming continues to pick up traction with New Jersey, Nevada, and Massachusetts recently passing or considering online gaming legislation and Fitch Ratings believes that state-level online gaming could become operational by the end of this year or early next year. Longer term, a successful initial rollout in states like Nevada, New Jersey, and Delaware would spur an acceleration; other gaming states would move quickly to adopt similar measures if the regulatory, legal, practical, and social hurdles and concerns prove manageable.

On Tuesday, New Jersey Governor Chris Christie signed an online gaming bill, paving the way for the state to become the most meaningful individual state to pass online gaming legislation so far. This was largely anticipated following his conditional veto on Feb. 7 of an online gaming bill passed by the state's legislature in December 2012. Governor Christie pushed for an increase in the gaming tax rate to 15% from 10%, a 10-year sunset provision to allow for a review of online gaming in the state, and additional safeguards.

We believe the passage of online gaming in New Jersey is a positive ratings consideration for Borgata and to lesser extent for Caesars Entertainment Corp (Caesars). We rate Borgata's issuer default rating (IDR) 'B-' with a Stable Rating Outlook and Caesars' IDR 'CCC' with a Negative Rating Outlook. (Marina District Finance Company, Inc. is the issuing entity for Borgata).

Nevada and Delaware previously passed online gaming legislation, but their population bases are much smaller and therefore less meaningful on a stand-alone basis. Nevada rushed to pass a bill last week allowing it to enter into agreements to pool players with other states as passage of the New Jersey bill became apparent. The Massachusetts legislature also recently introduced two bills related to online gaming encompassing the ability to sell lottery tickets over the internet and the ability to grant internet gaming licenses, providing additional political momentum.

Nevada's legislative action reinforced our view that the state will continue to strive to remain at the forefront of the evolving gaming industry and recognized its online gaming market would be limited on a stand-alone basis. As gambling has become more socially accepted and proliferated across the United States over the past 25 years, we have seen states become increasingly competitive with respect to gambling expansion initiatives.

Gaming expansion typically follows a path of least resistance to establish initial operations, then grows from there. For example, language in the 1988 Indian Gaming Regulatory Act permitted "electronic, computer, or other technologic aids" to bingo ultimately resulted in slot-like terminals initially and full-service casinos over time, fuelling what is today a $27 billion Native American gaming industry. Rarely do we see a contraction of gaming offerings. The potential agreements to pool players between states as contemplated by the Nevada bill can likely be attributed to similar practices in the lottery industry, such as Powerball.

New Jersey was incentivized to be an early mover with online gaming, as its gaming revenues have declined from a peak of more than $5 billion in 2006 to its current level of roughly $3 billion as Pennsylvania and New York gaming markets ramped up. Implementing online gaming may help offset concerns relating to the possible gaming expansion in New York in the near term and an additional Philadelphia casino longer term. If the New York legislature passes an expansion bill this session (which may include table games at Aqueduct and Yonkers), the measure will go to a referendum this November.

The biggest question surrounding online gaming expansion is whether an acceleration of state-level gaming initiatives spurs federal-level regulation at some point over the next several years. We believe this is possible, but not necessarily probable. In the meantime, New Jersey, Nevada, and Delaware are bearing the initial implementation risk, but we expect other states to follow aggressively if operations commence without material issues.

For more information this topic, please see our reports: "Fitch: Imminent Online Gaming in N.J. Positive for Borgata & Caesars," dated Feb 19, 2013 and "States and Locals Turn to Gaming: Expansionary Trend Will Produce Winners and Losers," dated Sept. 20, 2012 both available at www.fitchratings.com.

In addition, we regularly summarize various online gaming bills and provide an overview of recent trends in online gaming and of companies that may benefit from proliferation of online gaming in the U.S in Fitch's Online Gaming Monitor, last published on Feb. 19, 2013

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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Contacts

Fitch Ratings
Michael Paladino, CFA, +1 212-908-9113
Senior Director
Corporates
or
Alex Bumazhny, +1 212-908-9179
Director
Corporates
or
Kellie Geressy-Nilsen, +1 212-908-9123
Senior Director
Fitch Wire
Fitch, Inc.
One State Street Plaza
New York, NY 10004
or
Media Relations:
Brian Bertsch, New York, +1 212-908-0549
brian.bertsch@fitchratings.com