Fitch: U.S. Regional Gaming Weakness to Persist

NEW YORK--()--Link to Fitch Ratings' Report: U.S. Regional Gaming: Long-Term Headwinds Abound (A Study of Secular Trends in U.S. Regional Gaming)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=751939

Long-term robust same-store growth in U.S. bricks-and-mortar regional gaming is unlikely, according to Fitch Ratings. We attribute this pessimism to longer term structural macroeconomic and secular factors. Notable factors include saturation across regional markets; stagnant wages among the lower tier players; reprioritization of disposable income; proliferation of online/social gaming; potentially lower propensity to gamble among younger generations; and lowered preparedness for retirement by baby boomers.

The U.S. regional gaming supply has largely met demand, with most states now having some form of casino-based gambling. Only a handful of states that have meaningful prospects of legalizing casinos over the next several years (e.g. Kentucky, New Hampshire) remain, with Texas a longer term possibility. Results could be lackluster, even if more states allow casinos, as is the case in Ohio, which we estimate cannibalized roughly one-third of its revenues from surrounding states.

Casino-themed social games are a net negative for the U.S. regional casino operators. We believe there is meaningful overlap between casino and social game players, and spending on social games, along with lotteries and other low-cost, convenient alternatives, eats into the customers' casino and other recreational budgets. We are less concerned about online gaming legislation, which we do not expect to pass on the federal level in the near- to medium term.

Baby boomers make up a critical core of the existing gambler base. Low interest rates are dampening seniors' incomes in the near term. Longer term, the solvency of Social Security funds could be a factor, as some combination of new revenues and lower benefits is required to keep the Social Security funds solvent, according to the Social Security's trustee reports.

Out of the four main U.S. pure-play regional operators, Isle of Capri Casino, Inc. is most vulnerable to a long-term moderate same-store revenue decline scenario, but Penn National Gaming, Inc. is more vulnerable in more severe scenarios given its fixed-cost structure. Pinnacle Entertainment, Inc. is best positioned due to its strong free cash flow (FCF). Boyd Gaming Corp. also benefits from the FCF at Peninsula Gaming LLC and its net operating losses (NOLs).

We estimate gaming revenues derived from slots in regional markets will decline to roughly 75% of total revenue by 2030 from the current mix of about 85%. The shift largely reflects the younger generations' preference for table games. With only a modest new supply coming online, suppliers' slot sales and operations will likely continue to struggle. We see consolidation with lottery and table game suppliers and participation in social gaming as smart hedges against the difficult backdrop for the suppliers' core products.

A special report released Monday discusses Fitch's longer term outlook for regional gaming. The report explores issues affecting regional gaming from near-term factors such as the implementation of Affordable Care Act to longer term secular issues such as the proliferation of online and social gaming and the shift in the casino customer demographics. The report also includes sensitivity analysis using various revenue growth rates for the major regional operators.

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
Fitch Ratings
33 Whitehall Street
New York, NY
or
Alex Bumazhny, CFA, +1 212-908-9179
Director
Corporates
or
Kellie Geressy-Nilsen, +1 212-908-9123
Senior Director
Fitch Wire
or
Media Relations:
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brian.bertsch@fitchratings.com

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Contacts

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