Refinancing hurdles loom for casino firms

NEW YORK, July 15 (Reuters) - U.S. gaming bonds have been
some of the best fixed-income performers in 2010, but rating
agencies are warning that weaker casino companies could
struggle with mounting cash needs in coming years.

MGM Resorts (MGM.N), Boyd Gaming (BYD.N) and Isle of Capri(ISLE.O) are among a number of casino companies that may face refinancing hurdles without equity infusions or a rise in gaming revenues, Moody's Investors Service analysts Keith Foley and Peggy Holloway said in a recent report.

"Our guess is that bondholders are happy that the industry is probably not going to get much worse from here," Holloway said in an interview. "That might be the case, but most of these companies need growth in order to satisfy all their
debt-service obligations going forward."

Last month, Moody's changed its outlook on the casino sector to stable from negative on signs a revenue slump is bottoming, but the industry is stabilizing "at a very weak place," Holloway said.

With the job market poor and economy sluggish, consumers are unlikely to boost spending much on discretionary items such as gambling, she said.

That could spell trouble for a number of companies that need a pickup in revenue to increase cash flow and deleverage, she said.

MGM, for example, levered up its balance sheet for expansion projects, most notably the CityCenter development in Las Vegas, and an aggressive stock-buyback program just before the recession hit, said Chris Snow, an analyst at independent
research service CreditSights. When the economy slowed, MGM was hurt by cutbacks in consumer spending and corporate travel, plus an oversupply of rooms in the Nevada market, he said.

MGM bought itself some breathing room this year by extending maturities on a large part of its credit facility and selling senior notes and convertible bonds to help pay down debt.

However, liquidity is still a concern, according to Fitch Ratings.

MGM'S BILLION-DOLLAR BURDEN

MGM can generate about $1.05 billion to $1.25 billion in earnings before interest, taxes, depreciation and amortization, or EBITDA, but its interest costs are about $1 billion, leaving very little to reinvest in its properties, said Michael Paladino, an analyst at Fitch Ratings.

A spokesman for MGM did not have an immediate comment.

MGM is expected to generate cash with an initial public offering of its joint venture in Macau later this year and the sale of its interest in the Borgata casino in Atlantic City. The company has also said the Las Vegas market is healing and
its convention bookings have improved.

However, if the economy weakens and its cash raising does not go as well as expected, "their financial profile is still very weak," Paladino said.

CreditSights' Snow said he believes MGM's refinancing needs, though significant, are manageable.

While MGM has enough liquidity to meet its 2010 and 2011 maturing debt, it faces refinancing risks after that, with about $6.6 billion of the company's debt maturing between 2013 and 2015, according to Paladino.

GAMBLING ON RECOVERY

Boyd Gaming will likely have ample free cash flow to pay
debt service and capital expenditures this year, but with its
exposure to the weak local gambling market in Las Vegas, it may
have trouble meeting leverage covenants in its bank facility in
2011, rating agencies have warned.

Isle of Capri has several years before its debt matures but may eventually face liquidity issues, Moody's said in its
report. Isle announced a share offering in June to help pay
down debt, but postponed the deal because of market
conditions.

The delayed share offering could signal that access to the
equity markets will not be easy for other highly leveraged
gaming companies, Moody's said.

And without equity support, casinos will have a hard time surviving
another 12 to 18 months of flat or declining profits, the agency said.