Credit has been the overriding factor in driving gaming equities for more than a year. Leverage, liquidity, covenants, etc. are a bigger part of my lexicon than ever before. The good news is the overall credit markets are on fire and are open for business.
The gaming regionals have done their part in "colluding" to pry the markets open by blowing out their respective quarters. The average gaming bond yield is down 350bps in the last two weeks alone and down 875bps in less than 2 months. These are huge moves, as can be seen below in some selected examples.
PNK, PENN, and ASCA all have credit facilities that mature next year. This wide crack in the markets presents the right time for these companies to shore up their balance sheets. All three of the companies could end up floating bonds with sub 10% yields. ASCA is probably the wild card given the higher leverage. Nevertheless, we believe successful debt raises would be positive for the equities of these companies and also the entire sector.
With balance sheets secure (no liquidity, refinancing, or covenant issues) and free cash flow accelerating, FCF yields should come down (stocks higher). We need to reevaluate our prior 15% FCF target yield for the regionals, especially since FCF is based on what could be trough EBITDA.
