Gaming companies find support as debt and leverage reduction take center stage
Howard Stutz has over 30 years of experience reporting on the gaming industry.

Literally two minutes after MGM Resorts International announced Monday that it had closed the $4.25 billion sale and leaseback of the Bellagio, the company sent out a second press release stating it would redeem more than $1.878 billion in debt that is due over the next two years.

A portion of the proceeds from the Bellagio deal went right to a reduction of the $15.1 billion in long-term debt that MGM had on the books as of Sept. 30. That’s part of what MGM Chairman and CEO Jim Murren meant by building a “fortress balance sheet.”

Debt reduction allows the company to be “far less vulnerable,” Murren told me in an interview last month for The Nevada Independent. He is also concerned about a potential downturn in the economic cycle.

“Whatever happens, we have to be prepared, and we need to do so in a position of strength,” Murren said. “Our goal is to build a good balance sheet and reinvest in high-growth opportunities. We’re late in that economic cycle and we need to be prepared for the unforeseen.”

Other gaming companies have a similar attitude toward debt but are taking a different approach by extending out the maturity dates when the obligations will come due. Jefferies gaming analyst David Katz cited several reasons for the activity in a research note Monday, including a favorable debt capital market, the attractive cost of capital, and interest from investors.

On Monday, Boyd Gaming Corp. said it was raising $750 million to pay off debt maturities coming due in 2023. On Tuesday, the casino operator said it was raising the amount to $1 billion. The maturity dates would extend to 2027.

Also Monday, real estate investment trust VICI Properties said it was raising $1.75 billion and would use the proceeds to refinance the existing $1.55 billion real estate mortgage covering Caesars Palace in Las Vegas.

Last week, Scientific Games said it would refinance $1.2 billion of the company’s long-term debt, announcing new notes that would extend the current maturities up to seven years.

“The news is consistent with our view that the credit markets remain supportive and that stocks of companies with higher relative leverage should continue to outperform,” Katz told investors in the note.

However, he said an “interesting dichotomy” exists among gaming stocks where support from “traditional leverage markets does not necessarily coincide” with the current mergers-and-acquisitions activity in the casino sector.

Real estate investment trust involvement, meanwhile, is skewing the values on the operations side. MGM’s deal to sell the Bellagio’s real estate and buildings to a Blackstone-controlled REIT while retaining the resort’s operations in exchange for annual rent payments of $245 million was not a surprise.

However, Katz said the news was “not consistent with the positive trend in the debt market, given that MGM is replacing traditional debt with more expensive fixed debt.”

In the pending $17.3 billion merger between Eldorado Resorts and Caesars Entertainment, VICI already owns the real estate associated with 16 resorts operated by Caesars, while Gaming and Leisure Properties owns the real estate of five casinos Eldorado acquired last year from Tropicana Entertainment.

Once the merger is completed, VICI will acquire three Caesars properties under the Harrah’s brand in Atlantic City, Laughlin, Nevada, and New Orleans for a combined $1.8 billion. VICI will lease the operations back to Eldorado for total annual rent of $154 million.

“Nonetheless, good news for all gaming stocks, the more leverage the better,” Katz wrote.

In an interview Tuesday on CNBC’s “Squawk Box,” Eldorado CEO Thomas Reeg said the combined companies’ leverage will be much higher than that under which the Reno-based casino operator normally operates. He said the goal is to pay down “$4 billion to $5 billion of debt in the first 24 months” operating as the merged company. Eldorado is also committed to reducing corporate costs by $500 million.

“We think we can drive leverage below three times (cash flow) and we will be rewarded with expanded multiples,” Reeg the CNBC interviewers.

Reducing leverage and paying down debt was an ongoing theme throughout the third quarter earnings season. Scientific Games CEO Barry Cottle said on Nov. 7 that the gaming equipment supplier was on course for “5.5 times net debt leverage by the end of 2020.”

Katz viewed this week’s announcements as “modestly positive” for the companies and added the developments were “a positive” for companies such as Churchill Downs and Golden Entertainment, which are “in the midst of funding growth.”