Financial health of casino firms may help decide which gets region's license
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The three publicly traded casino companies seeking the sole casino license for western Massachusetts are each carrying billions of dollars in debt, financial filings with the U.S. Securities and Exchange Commission show, even as each plots what would be at least a $500 million expansion into the commonwealth.
Those obligations are not expected to hinder developers' ability finance a new casino, industry analysts said. Massachusetts is a potentially lucrative market for the gaming industry, they said, one that should easily attract the Wall Street dollars needed to build a new casino. Once built, such a facility should be able generate enough income to cover the winning company's debt payments, the analysts said.
"We have already seen what Foxwoods and Mohegan Sun have done in that environment," said Roger Gros, publisher of Global Gaming Business Magazine. "I think any one of them could get the funding."
But the ability of Ameristar Casinos, MGM Resorts International and Mohegan Sun to pay their debts matters in another way. The newly formed state gaming commission will consider the financial standing of each when it begins reviewing applications sometime later this year, and financial health may help determine who ultimately wins the region's license. The state's recently passed gaming law requires potential developers to spend at least $500 million on a new casino.
What reports reveal
Each company faces varying financial challenges, filings with the SEC show. Mohegan Sun is attempting to refinance its $1.6 billion in debt, of which $811 million is due this year. A first payment of $535 million is due in March and the company's annual filing to the SEC expresses concerns about Mohegan's ability to make those payments.
Ameristar has a smaller revenue stream than its competitors.
And MGM has not recorded a profit in the last three years. Last week the company announced it had completed a deal to borrow an additional $850 million, adding to a long-term debt load that already totaled around $13 billion.
All three companies saw revenues slump in 2009, 2010 or both, although in MGM's case the numbers rebounded slightly in 2010, according to SEC filings. Ameristar had also shown a slight increase in revenues through the first three quarters of 2011.
Hard Rock International, a fourth developer seeking to build a casino in Holyoke, is owned by the Seminole Tribe of Florida and is a private company. No financial information on the company was available.
The financial challenges facing the trio are, to different degrees, representative of the circumstances facing the industry as a whole. Casino companies typically carry large debt, but normally have sufficient cash flow to cover their payments, said Clyde Barrows, director of the New England Gaming Project at the University of Massachusetts Dartmouth.
The recession has battered the balance sheets of companies industry-wide, producing a precipitous drop in revenues and sparking a series of foreclosures, Barrows said. Gross gaming revenues declined from a high of $37.5 billion in 2007 and bottomed out at $34.28 billion in 2009 before rising slightly to $34.6 billion in 2010, according to the American Gaming Association, an industry lobbying group.
Among the casinos foreclosed upon in recent years, he said, are the Atlantic City (N.J.) Hilton, the Tropicana, also in Atlantic City, and Twin Rivers casino in Rhode Island.
"The casino industry has been relatively recession-proof dating back to the 1970s," Barrows said. "This is the first time in modern casino history that we've seen gross revenues decline."
Mohegan Sun
Of the three public companies, Mohegan Sun's financial situation is the most precarious, analysts said. The company plans to build a $600 million resort casino in Palmer, complete with 2,500 slot machines, 100 table games, a luxury hotel and a 1,500-seat entertainment venue.
In its annual report to the SEC, the company said it "did not anticipate that cash flow from operations and cash on hand will be sufficient to repay amounts outstanding," and expressed concern about its ability to stay in business.
"We may be unable to refinance or extend our substantial indebtedness, including substantial indebtedness maturing in fiscal year 2012, raising doubt about our ability to continue as a going concern," the report said.
In an interview with the Gazette, Mario Kontomerkos, Mohegan Sun chief financial officer, dismissed such statements as procedural, and not a true indication of the company's financial health. The company is in the process of refinancing its debt, he said, and the annual report, known as a 10K, was completed before those negotiations were completed, thus obliging Mohegan's auditors to use such language.
"The financial health of the company is very strong," Kontomerkos said, noting Mohegan Sun remains committed to building in Palmer. "We have made a lot of progress on that refinancing to the point that we feel pretty confident that we will be successful."
But analysts expressed doubts.
Barrows, the UMass Darmouth professor, said while a refinancing deal would cover Mohegan's current operations, it would not necessarily cover new investments.
"They are not necessarily in the position to be leveraging more debt to build a new casino," Barrows said. "If they were a private company they probably would have been foreclosed upon at this point."
As the owners of the casino company and a federally recognized tribe, the Mohegans have sovereignty over their property on tribal land, making it difficult for investors to foreclose on the company's properties should it default, Barrows said.
A precedent for a restructuring deal may have been set in New Mexico last year, where investors struck a deal with the Mescalero Apache tribe over $200 million in debts, he said. Investors agreed to take a short-term loss on the front end of the loan, in exchange for a longer term on the loans, with the hope of recouping their losses in the future. Such a scenario could well play out with Mohegans and their investors, Barrows said.
Still, investors might be a little "gun shy" about investing with the tribe in Massachusetts, said Gros, the gaming magazine publisher.
"It is much more difficult for investors to become whole one way or another if (Mohegan Sun) runs into trouble," he said.
Kontomerkos rejected that argument, saying investors have shown no doubt about lending to the company in the past. And he noted that the tribe's gaming operations were generating cash flow. Mohegan's profits rebounded from $7.5 million in 2010 to $111.8 million in 2011, according to SEC filings. However, the company's revenue numbers continue to slump, falling three consecutive years from $1.46 billion in 2009 to 1.42 billion in 2011.
"We generate a lot of cash flow and we have a good debt-to-EBITDA ratio relative to the other companies in our industry," Kontomerkos said.
EBITDA is an accounting term that stands for earning before interest, taxes, depreciation and amortization. A debt-to-EBITDA ratio, known also as a leverage ratio, is used by financial analysts to evaluate a company's ability to pay off its debt. The higher the ratio, the more difficulty a company has meeting its obligations.
Under the terms of its loans, Mohegan's lenders could recoup their investment in the company if it were to exceed a leverage ratio of 6.25 to 1, according to the SEC filings.
According to a Jan. 13 report from Deutsche Bank, Mohegan Sun has a current leverage ratio of 5.7 to 1.
By comparison, Ameristar had a leverage ratio of 5.2 to 1, while MGM had the worst ratio of the trio at 9 to 1, according to Deursche Bank report.
Ameristar
Troy Stremming, Ameristar senior vice president of government relations and public affairs, said his company is well placed to meet its debt following a $2.2 billion refinancing last year. The company is exploring plans to build a casino with up to 4,500 slot machines, 125 to 150 table games and 500 to 700 hotel games in East Springfield.
"We are paying down substantial debt in 2011," Stremming said. "There is no doubt we have the cash flow and borrowing capacity to build a facility that Springfield and the commonwealth deserve and will be extremely proud of."
Ameristar is a smaller casino operator than its western Massachusetts competitors, running smaller facilities that cater to the local populace and generate significantly less revenue, analysts said. According to its filings with the SEC, Ameristar had net revenues of $1.19 billion in 2010, $1.21 billion in 2009 and $1.27 billion in 2008.
MGM, in comparison, reported net revenues of $6.01 billion, $5.98 billion and $7.2 billion in 2010, 2009 and 2008 respectively, according to its SEC filings.
"Ameristar is a good transparent company, but frankly I see it being tough for them to compete," Gros said.
Stremming disagreed, saying, "At the end of the day, from the operation perspective, I would put our operational success and our bottom line up against anyone in the game sector."
MGM
MGM, despite its status as a giant in the industry, has its share of financial problems. The company, which is proposing a casino for Brimfield, posted total losses of $1.4 billion in 2010, $1.2 billion and $855 million in 2008, according to the company's filings with the SEC. And MGM had approximately $13 billion in debt at the end of September, prior to its most recent $850 million bond offering.
The company's financial relationship with Pansy Ho, a Chinese investor and daughter of Macau and Hong Kong gaming mogul Stanley Ho, has raised concerns. The New Jersey Casino Control Commission concluded that Stanley Ho had extensive ties to Chinese organized crime, and ordered the company to either sell its stake in the Borgata Casino and Spa in Atlantic City or severe its connections with Ho. The company chose to sell.
CityCenter, the company's $8.5 billion urban complex and joint venture with Dubai World on the Las Vegas Strip, has struggled since opening in 2006, posting net losses of $67.8 million in 2008, $522.3 million in 2009 and $1.1 billion in 2010, according to SEC filings. Through September, the casino was showing a net loss of $387.6 million.
Alan Feldman, MGM senior vice president for external affairs, acknowledged the concerns over the company's debt and argued that the finances of CityCenter were beginning to turn around.
"We'll be the first to acknowledge that we have to get our debt ratio lower," Feldman said. "But we also acknowledge that we have had great success accessing the capital markets."
The company's strong cash flow numbers and ability to borrow in the capital markets leave it well placed to advance its Massachusetts casino plans, Feldman said.
The financial capacity of Hard Rock is less known. Joe Lashinger, a managing partner for Paper City LLC, which is working with Hard Rock to build a casino in Holyoke, could not be reached for comment.
The Seminole Tribe generally leases the Hard Rock brand, which it acquired in 2006, to casino operators, and does not typically run a casino, Barrows said. Approximately half the tribe's revenue comes from a casino it runs in Tampa Bay, Fla., he said.
The biggest question facing the Hard Rock project is whether Holyoke will approve a casino, analysts said. They noted that Holyoke Mayor Alex Morse has expressed opposition to the idea.
"I think it's all pretty much even right now," Gros said. "The Mohegans were smart to be the first one in and court the community where they want to locate, but they have financial problems. Ameristar is a good company, but are probably too small to compete. Hard Rock has a great brand, but there are questions about if their host community wants them. MGM has just started, but they're the big company."
