With just one month remaining in 2022, it appears likely that casino operators will set an annual record for gross gaming revenue (GGR) this year. But things are likely to get tougher from here for the industry, according to Moody’s Investors Service.
The research firm acknowledges that while the pace of monthly year-over-year GGR increases is slowing, consumer spending directed to casinos has some room left to tick higher or stabilize. That’s as pent-up demand created by the coronavirus pandemic remains a catalyst. However, that slowing pace shouldn’t be ignored.
While conditions are still good for US gaming, the slowing pace of revenue growth may be an early sign that consumer demand for casino gaming will be tougher in months ahead,” noted Moody’s. “As consumers spend more on basic needs as inflation trends higher, we expect gaming revenue growth to lose further momentum. The longer current economic challenges persist, the tougher it will be for US gaming issuers to sustain their solid earnings performance.”
As just one example of the strength of the domestic gaming industry, Nevada is on a 20-month run of GGR of at least $1 billion through October. That despite macroeconomic headwinds, such as high inflation and surging interest rates.
Inflation, Interest Rates Problematic
Some gaming executives are already signaling that inflation is weighing on spending trends at gaming venues across the country. That manifests itself in a variety of ways, including reduced trips to regional casinos due to high gas prices or less impulse spending in destination markets such as Las Vegas.
With travel and leisure, including casinos, considered a consumer discretionary industry, the group is highly vulnerable to inflation and would-be visitors deciding to tighten their purse strings.
Rising interest rates, which are the Federal Reserve’s primary avenue for combating inflation, are a potential drag on the gaming industry for another reason. The group is among the most indebted in the country and higher borrowing costs diminishes the allure of, in some cases, necessary refinancing.
“Eventually, US gaming companies will have to refinance in what will likely be a more onerous interest rate environment. While there’s not much debt maturating in the next three years, there are three US gaming issuers with heavy funded debt amortization requirements through December 2025,” added Moody’s.
The ratings agency mentioned Caesars Entertainment (NASDAQ:CZR), MGM Resorts International (NYSE:MGM) and Wynn Resorts (NASDAQ: WYNN) as some of the operators that could need to “refinance a large part of their debt capital structure during a period of substantially higher interest rates.”
Moody’s Forecasts Free Cash Declines
Free cash flow has long been one of investors’ most coveted traits when it comes to casino gaming equities, but that metric could be pinched if earnings before interest, taxes, depreciation and amortization (EBITDA) are suppressed by macroeconomic concerns.
Declining free cash flow could also weigh on operators’ ability to service debt obligations, which could be a cause for concern if a recession arrives.
“As the economy continues to weaken, pressures will grow on EBITDA performance and rising interest rates pressures will cannibalize free cash flow as debt costs rise,” concluded Moody’s. “Similarly, if operating conditions continue to deteriorate, capital expenditures could be further directed toward maintenance levels to preserve cash resources. We expect to see US gaming issuers turn increasingly to financial engineering-type transactions, which we typically categorize as a distressed exchange (DE), or default.”
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