When someone shares with you something of value, you have an obligation to share it with others.
Wednesday, 22 October 2008
MGM, Sands, Boyd may be edging closer to bankruptcy
Any one of three major Nevada gaming companies based in Las Vegas could face the prospect of bankruptcy because of heavy debt and falling stock prices, a University of Nevada, Reno professor and gaming expert said.
MGM, Sands, Boyd may be edging closer to bankruptcy
BY RAY HAGAR 18 October 2008
Any one of three major Nevada gaming companies based in Las Vegas could face the prospect of bankruptcy because of heavy debt and falling stock prices, a University of Nevada, Reno professor and gaming expert said.
MGM Mirage, Las Vegas Sands and Boyd Gaming Corp. “have gotten whip-sawed” by debt markets and the global economy, said Bill Eadington, the director of the Institute for the Study of Gaming and Commercial Gaming at UNR.
Stock prices tell much of the story, Eadington said.
• MGM Mirage traded at $15 Friday, down from a 52-week high of $95.66. • Las Vegas Sands was at $13.06 Friday with a 52-week high of $148.76. • Boyd Gaming traded at $5.22 after a $42.85 high.
“Either they are phenomenally good (stock) buys or some of these companies are not going to be around,” Eadington told an advanced economics class at UNR this week.
“You look at your share price, how else do you lose about 95 percent of your value unless someone is really getting nervous?” Eadington said. “There is only five percent to go and it is not a long way.”
Bill Lerner, managing director and gaming and lodging analyst of Deutsche Bank Securities in Las Vegas, said last week that he has received calls from serious investors concerned about bankruptcy risks for the three publicly-traded giants.
The debt associated with expansion projects, such as the MGM’s $11 billion, 68-acre City Center project, has raised doubt with investors, Lerner said.
“Public casino companies that have more relative debt, like Las Vegas Sands, like MGM, like Boyd, you take a look at the destruction of the value of those stocks and it is an indication that bankruptcy is where they may be headed,” Lerner said. Lerner added that he does not think any of the three will fall.
“It doesn’t make any sense to me but those are the types of questions we are getting from investors, the institutional, smart investor,” Lerner said. “I don’t agree with it for the publicly traded companies.
“But that is what the market is essentially saying,” he said. “For Sands, MGM and Boyd, I think that is a concern. Because of the debt burden associated with all of the development in the pipeline, that these companies, in conjunction with the cyclical downturn, won’t be able to finance their debt or service it.”
Las Vegas Sands does not comment or manage its business based on rumour or speculation, spokesman Ron Reese said.
A representative of Boyd Gaming said notions of bankruptcy are preposterous.
“I would invite you to look at our quarterly press releases and you will see that we are a company that is producing a positive cash flow,” said Rob Stillwell, vice president corporate communications for Boyd Gaming, who was educated at Bishop Manogue High School and UNR. “It is unfortunate that in this difficult economic environment, most of the conversation surrounds the worse-case scenarios.”
Monarch stock drops, too
Another Nevada gaming stock, Monarch Casino & Resort, represents the parent company of Reno’s Atlantis Casino Resort Spa. Monarch also has taken a plunge: It’s 52-week high is $31.41 and it was trading Friday at $7.10.
Monarch, whose lone property is the Atlantis, is not threatened by bankruptcy, gaming experts said.
John Farahi, CEO and co-chairman of Monarch, did not respond to a request for comment.
“Their revenues are down and they are down comparable to others in the marketplace,” Reno gaming analyst Michael Alonso said. “But Monarch has a great balance sheet and they don’t have a lot of debt. And the debt that they do have they used to do a buy-back program on their stock.”
Farahi recently invested more than $75 million in property upgrades at the Atlantis, including a skybridge to the nearby Reno-Sparks Convention Center.
“I think they are unfairly getting painted with the broad brush that the gaming and hospitality business is just down right now,” Alonso said.
The 52-week highs of the stocks of MGM, Boyd and Las Vegas Sands were partially based on projected growth from major projects, experts said.
“I go back to old fundamental principles,” Eadington said. “Markets always overreact. So with gaming stock, there was an irrational exuberance at one end and now we are seeing an overreaction that the other end.”
Perhaps the most spectacular of the projects under construction is the MGM’s City Center on the Strip, the largest ever private sector construction project. It is expected to open late next year or early in 2010, according to the Los Angeles Times.
When Boyd Gaming Corp. announced in August that it would delay construction of the $4.8 billion Echelon project because of the souring credit markets, its stock went up.
City Center expenses doesn’t help attract investors to MGM stock, Alonso said.
“A few years ago, the MGM would have had no problem borrowing money to do City Center,” Alonso said. “Recently, they announced that they have more than half of the financing committed for the project and that they can get the rest,” Alonso said. “The problem is going to be the interest expense. Gaming had access to very cheap financing in the last decade but that is gone. These interest rates in these deals, because of the capitol markets being so high, are going to be more expensive.”
Macau’s impact
Macau’s gross gaming revenue for September was expected to reach $900 million to $938 million, according to Portugal’s Lusa News Agency, which quoted sources from gaming operators.
Yet those revenues signal a slowing of the red-hot growth the city has experienced since opening its gaming to international investments in 2002, experts said.
The Las Vegas Sands, MGM and Wynn all have properties in Macau.
Despite Macau’s phenomenal growth, casino profits have been disappointing, experts said.
Profits are siphoned of by the Chinese government’s 40 percent gaming tax, the expense and complications to attract VIP gamblers and the Chinese government’s effort to limit the number of gamblers going to Macau.
“MGM and Las Vegas Sands, more so, have big interests in the Macau market and the Macau market is not performing to the level that Wall Street analysts and investors were hoping for,” Alonso said.
“The profit margins are much lower than you would expect, given the revenue volumes,” Eadington said. “I think there was a lot of anticipation that the stocks would be going through the roof because of Macau. But the profitability just has not been there and as a result, it has probably push down (stock) values because of the disappointment factor.”
Stocks of MGM and Boyd stocks are listed as “hold” in the Standard & Poor’s stock recommendations of Oct. 11.
Las Vegas Sands is listed as “sell” with two stars by S&P.
“We look for this company’s long-term profit picture to be closely connected to the development of new casino projects and real estate in China and Singapore,” the S&P recommendation stated. “In our view, the extent of possible development costs in those markets, questions about demand in those markets, and the possibility of regulatory change there add risk.”
When investors ask about bankruptcy risks in Las Vegas, the MGM Mirage is “among the highest frequency regarding this topic,” Lerner said recently in one of Deutsche Bank’s daily e-mail reports.
Yet, a liquidity analysis showed that MGM “will likely have notable financial cushion after contemplating capital needs for City Center completion and two bond maturities in 2009,” Lerner wrote. “We estimate 2009 liquidity ranging from $2.65 billion to a more probable $3.85 billion. We forecast capital needs of $850 million to $2.15 billion. The result is cushion ranging from $3 billion down to a less likely $500 million.”
1 comment:
MGM, Sands, Boyd may be edging closer to bankruptcy
BY RAY HAGAR
18 October 2008
Any one of three major Nevada gaming companies based in Las Vegas could face the prospect of bankruptcy because of heavy debt and falling stock prices, a University of Nevada, Reno professor and gaming expert said.
MGM Mirage, Las Vegas Sands and Boyd Gaming Corp. “have gotten whip-sawed” by debt markets and the global economy, said Bill Eadington, the director of the Institute for the Study of Gaming and Commercial Gaming at UNR.
Stock prices tell much of the story, Eadington said.
• MGM Mirage traded at $15 Friday, down from a 52-week high of $95.66.
• Las Vegas Sands was at $13.06 Friday with a 52-week high of $148.76.
• Boyd Gaming traded at $5.22 after a $42.85 high.
“Either they are phenomenally good (stock) buys or some of these companies are not going to be around,” Eadington told an advanced economics class at UNR this week.
“You look at your share price, how else do you lose about 95 percent of your value unless someone is really getting nervous?” Eadington said. “There is only five percent to go and it is not a long way.”
Bill Lerner, managing director and gaming and lodging analyst of Deutsche Bank Securities in Las Vegas, said last week that he has received calls from serious investors concerned about bankruptcy risks for the three publicly-traded giants.
The debt associated with expansion projects, such as the MGM’s $11 billion, 68-acre City Center project, has raised doubt with investors, Lerner said.
“Public casino companies that have more relative debt, like Las Vegas Sands, like MGM, like Boyd, you take a look at the destruction of the value of those stocks and it is an indication that bankruptcy is where they may be headed,” Lerner said. Lerner added that he does not think any of the three will fall.
“It doesn’t make any sense to me but those are the types of questions we are getting from investors, the institutional, smart investor,” Lerner said. “I don’t agree with it for the publicly traded companies.
“But that is what the market is essentially saying,” he said. “For Sands, MGM and Boyd, I think that is a concern. Because of the debt burden associated with all of the development in the pipeline, that these companies, in conjunction with the cyclical downturn, won’t be able to finance their debt or service it.”
Las Vegas Sands does not comment or manage its business based on rumour or speculation, spokesman Ron Reese said.
A representative of Boyd Gaming said notions of bankruptcy are preposterous.
“I would invite you to look at our quarterly press releases and you will see that we are a company that is producing a positive cash flow,” said Rob Stillwell, vice president corporate communications for Boyd Gaming, who was educated at Bishop Manogue High School and UNR. “It is unfortunate that in this difficult economic environment, most of the conversation surrounds the worse-case scenarios.”
Monarch stock drops, too
Another Nevada gaming stock, Monarch Casino & Resort, represents the parent company of Reno’s Atlantis Casino Resort Spa. Monarch also has taken a plunge: It’s 52-week high is $31.41 and it was trading Friday at $7.10.
Monarch, whose lone property is the Atlantis, is not threatened by bankruptcy, gaming experts said.
John Farahi, CEO and co-chairman of Monarch, did not respond to a request for comment.
“Their revenues are down and they are down comparable to others in the marketplace,” Reno gaming analyst Michael Alonso said. “But Monarch has a great balance sheet and they don’t have a lot of debt. And the debt that they do have they used to do a buy-back program on their stock.”
Farahi recently invested more than $75 million in property upgrades at the Atlantis, including a skybridge to the nearby Reno-Sparks Convention Center.
“I think they are unfairly getting painted with the broad brush that the gaming and hospitality business is just down right now,” Alonso said.
The 52-week highs of the stocks of MGM, Boyd and Las Vegas Sands were partially based on projected growth from major projects, experts said.
“I go back to old fundamental principles,” Eadington said. “Markets always overreact. So with gaming stock, there was an irrational exuberance at one end and now we are seeing an overreaction that the other end.”
Perhaps the most spectacular of the projects under construction is the MGM’s City Center on the Strip, the largest ever private sector construction project. It is expected to open late next year or early in 2010, according to the Los Angeles Times.
When Boyd Gaming Corp. announced in August that it would delay construction of the $4.8 billion Echelon project because of the souring credit markets, its stock went up.
City Center expenses doesn’t help attract investors to MGM stock, Alonso said.
“A few years ago, the MGM would have had no problem borrowing money to do City Center,” Alonso said. “Recently, they announced that they have more than half of the financing committed for the project and that they can get the rest,” Alonso said. “The problem is going to be the interest expense. Gaming had access to very cheap financing in the last decade but that is gone. These interest rates in these deals, because of the capitol markets being so high, are going to be more expensive.”
Macau’s impact
Macau’s gross gaming revenue for September was expected to reach $900 million to $938 million, according to Portugal’s Lusa News Agency, which quoted sources from gaming operators.
Yet those revenues signal a slowing of the red-hot growth the city has experienced since opening its gaming to international investments in 2002, experts said.
The Las Vegas Sands, MGM and Wynn all have properties in Macau.
Despite Macau’s phenomenal growth, casino profits have been disappointing, experts said.
Profits are siphoned of by the Chinese government’s 40 percent gaming tax, the expense and complications to attract VIP gamblers and the Chinese government’s effort to limit the number of gamblers going to Macau.
“MGM and Las Vegas Sands, more so, have big interests in the Macau market and the Macau market is not performing to the level that Wall Street analysts and investors were hoping for,” Alonso said.
“The profit margins are much lower than you would expect, given the revenue volumes,” Eadington said. “I think there was a lot of anticipation that the stocks would be going through the roof because of Macau. But the profitability just has not been there and as a result, it has probably push down (stock) values because of the disappointment factor.”
Stocks of MGM and Boyd stocks are listed as “hold” in the Standard & Poor’s stock recommendations of Oct. 11.
Las Vegas Sands is listed as “sell” with two stars by S&P.
“We look for this company’s long-term profit picture to be closely connected to the development of new casino projects and real estate in China and Singapore,” the S&P recommendation stated. “In our view, the extent of possible development costs in those markets, questions about demand in those markets, and the possibility of regulatory change there add risk.”
When investors ask about bankruptcy risks in Las Vegas, the MGM Mirage is “among the highest frequency regarding this topic,” Lerner said recently in one of Deutsche Bank’s daily e-mail reports.
Yet, a liquidity analysis showed that MGM “will likely have notable financial cushion after contemplating capital needs for City Center completion and two bond maturities in 2009,” Lerner wrote. “We estimate 2009 liquidity ranging from $2.65 billion to a more probable $3.85 billion. We forecast capital needs of $850 million to $2.15 billion. The result is cushion ranging from $3 billion down to a less likely $500 million.”
Post a Comment