U.S. Gaming Companies Tread Risky Ground

Regional gaming companies in the United States run the risk of falling into a precarious financial situation and entering speculative-grade rating territory. Though they have the cash flow to improve their balance sheets, they hang on to large loads of debt, according to a new report from Moody’s Investors Service.

“The combined amount of debt held by regional gaming companies has barely budged over the past 18 months, contrary to our expectation that many would use free cash flow to repay debt in an effort to de-risk their balance sheets,” said Moody’s Senior Vice President Keith Foley.

The gaming industry carries high fixed costs. Many regional gaming companies are expected to carry debt-to-EBITDA (earnings before interest, tax, depreciation and amortization) ratios at or above five times through next year, Foley said. If a sudden drop in patronage were to occur, those companies who are highly leveraged could fall deeper in debt rather quickly. Though EBITDA will continue to increase, it may not grow at a pace that would improve leverage levels due to the few opportunities to reduce operating costs. Improvement in the debt-to-EBITDA ratio in the near term will likely be limited unless absolute debt is reduced.

Few incentives exist to deal with absolute debt, however. Free cash flow is positive, debt maturities are far in the future and chances to make acquisitions remain present. Those acquisitions have a positive effect on earnings and asset profiles, but they are also a financial burden that adds to the industry’s high financial risk, Moody’s said.

– Adam Fusco, associate editor

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