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    MARKET EDGES

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When I undertook the bankruptcy analysis for our recent conference call, I figured I would be loading the ball in the musket for the shorts. High leverage, big spending, declining returns all should’ve given me some ammo. On the contrary, my analysis uncovered a surprising level of liquidity which blew a hole in my initial bankruptcy thesis and may turn the shorts into duds. After trashing casino management teams over the years I have come away with a new respect for the CFOs at a lot of these companies and even less respect for this country’s big financial institutions. While levering up in the boom years could’ve been disastrous during this downturn, these guys negotiated credit facilities that provided their companies with very low borrowing costs and tremendous liquidity. They’ll be some serious sticker shock when these facilities are renegotiated beginning generally in 2010 but we’ll save that discussion for a later post.







  • The first chart shows the average trailing leverage ratio over the past 10 years. We are at a 10 year high which on the surface is troubling and looks like the end of the classic boom and bust cycle. However, liquidity profiles for most of the casino companies are in great shape and borrowing costs are low. Contrast this with the private gaming companies. This is where we’ve seen the recent bankruptcies and will likely see the next few bankruptcies.







  • The next chart is busy I know but drills down into the specific metrics for the casino operators. On the surface ISLE appears to be a bankruptcy candidate but Dale Black, CFO, has done an outstanding job with this once dire financial situation. Despite a ton of leverage and a low coverage ratio, near term liquidity is significant, the company is free cash flow positive on a net basis, and there are no significant debt maturities until 2012. BYD, PNK, and LVS maintain aggressive development pipelines but for the most part, projects can be cancelled or delayed. MGM is probably at most risk due to its high exposure to Las Vegas where I see the most downside. Moreover, MGM has high leverage and significant maturities in 2010. Kerkorian and Dubai World are, of course, potential backstops.







  • As the shorts continue to press the regional casino companies along with other highly leveraged companies, an advantageous liquidity situation seems to have been overlooked. The industry capitalized on the financing fat years by negotiating significant liquidity and low borrowing costs. Sure there are issues but significant liquidity will keep these guys out of the red zone until at least 2010.







Significant liquidity offsets historically high industry leverage
Low borrowing costs keep coverage ratios reasonable despite high leverage