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    MARKET EDGES

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We all should be congratulating the financial management teams (gaming not bank managements) for negotiating significant liquidity, loose covenants, and low rates in their credit facilities. Most of these deals were struck in 2005-2006. Unfortunately, all good things must come to an end. With maturities concentrated in 2010-2011 and capex spending still high, these guys have to be at least a little worried. Do they capitalize on any open credit window to refinance early at significantly higher rates or wait and hope that the environment improves markedly over the next year or two. This will be the classic rate vs. liquidity tradeoff. It’s all about risk management. Given the significant risks (declining fundamentals, higher LIBOR, CAPEX, etc.), the risk averse path may be the road most traveled. I guess analysts projecting 5% borrowing costs in perpetuity need to adjust their models.

I believe low interest rates have allowed these companies to over earn during the past several years. The following chart quantifies the amount by which these companies may be over earning. The analysis is based on the assumption that credit facilities were refinanced at estimated prevailing rates for all of 2008. In many cases the impact is huge. Most at risk going forward is Ameristar Casinos. ASCA’s revolver matures in November, 2010. The interest rate is strikingly low at LIBOR plus 1.63%. The prevailing rate in today’s environment would be 3-4% higher, all due to risk premium, essentially cutting ASCA’s EPS in half. If they opt for long-term bonds the impact will be greater.

Due to its CityCenter obligations, high leverage, and a 2011 maturity, MGM is another company to keep an eye on. MGM could be over earning by at $0.40 or 25% of current EPS. This story has a lot of risk. I continue to be worried about the Las Vegas fundamentals and the coming cancelation wave on the residential piece of CityCenter. Refinancing at the next window has to be considered. Look for significantly higher interest expense definitely not contemplated in analysts’ current estimates.

BYD and ISLE appear a bit scary on the surface but won’t see maturities until 2012 and 2013, respectively.

PENN and WYNN look solid due to low leverage and high liquidity. No worries here.


Risk aversion suggests refis, higher interest expens, and lower EPS