Similar to most consumer industries, these are indeed trying times for the casino sector. To get a better handle on their response to what I believe is the most important long term issue facing the industry, I emailed executives at all the major US casino companies. My question appears in the picture below right. One answer was completely worthy of publishing, which I have done, without edit, below. Complements to Bill Clifford, CFO of PENN, for his thoughtful response. Here you go:

  • "We believe the cost of capital has risen largely because the capital markets weren’t strict enough in evaluating the ability of borrowers to repay their loans. Lately, the capital markets and lenders have refocused on appropriate criteria with reluctance to grant cheap capital to over leveraged organizations or those with projects that, upon fuller analysis, don’t provide a very clear ability to generate adequate returns. Declining returns on investment in the gaming sector were caused in my opinion by granting capital based on a combination of very low base interest rates and virtually no credit risk premiums. These factors, when combined with competitive pressure to build the most and the best product, resulted in operators both initiating projects that were too costly to start and then going over budget (given the access to almost unlimited capital).

    It is my expectation that the capital markets will stabilize in the next year for everyone who has leverage below 4 to 5 times EBITDA which means that Sr. Debt will be available at Libor plus 300-400 basis points and sub debt will be available at 8 to 9 percent. Since gaming companies have historically traded at levels where they can be purchased by strategic buyers or private equity then it is possible that current gaming stock valuations have room to drop further. This is based on the concept that from a strategic perspective the transaction has to be free cash flow positive and the private equity expected returns on its equity has to be 20% (since they can get those levels on highly leveraged gaming credits today). All of the above is predicated on stabilized EBITDA and in the current environment, with most organizations experiencing declining profits, it is even more difficult to justify the valuations of most gaming companies today.

    Unlike many or most of our peers, Penn has the benefit of having a tremendous amount of flexibility with significant capital available to us and we need to be patient on two levels. Equity market investors will take time to adjust to the new debt markets era and the fact that many gaming companies are going to experience higher cost of debt as their current low interest rate borrowings come closer to maturing. At Penn, we are focused on ensuring that regardless of what we purchase that the company maintains a strong balance sheet and those acquisitions or new projects will make sense consistent with our views on future stabilized borrowing costs. In my opinion it will take time but there are going to be some incredibly discounted gaming assets available over the next 12 to 24 months. As we’ve said before, we stand ready to be very opportunistic in this environment which we believe will enable us to do very well for our shareholders."


Hopefully, gaming executives are "thinking" about The Question