Moody’s Views Casino Gaming Among Strongest Leisure Industries Heading Into 2021

Posted on: December 22, 2020, 12:15h. 

Last updated on: December 22, 2020, 01:47h.

Todd Shriber @etfgodfather Read More
Expertise: Financial, Gaming Business, Mergers and Acquisitions.

The travel and leisure industry is ready to put 2020 behind it, and Moody’s Investors Service sees gaming as one of the segments most likely to firm up next year.

Moody's Casino Recovery
The Las Vegas Strip. Moody’s sees improvement for casino operators in 2021, but prefers regional firms. (Image: NBC News)

Citing reopenings that commenced in the second quarter, the research firm says sequential earnings before interest, taxes, depreciation and amortization (EBITDA) growth for the current quarter will be within in a range of plus or minus five percent. That is consistent with the “stable” ratings outlook on the gaming industry.

Regional markets will outpace Las Vegas Strip operators’ recovery due to travel constraints and slow convention business recovery,” said Moody’s in a report out today.

Over the course of the coronavirus pandemic, which led to a fits and starts recovery for the gaming business, analysts consistently favored regional operators over competitors with significant destination market exposure. They noted that in the COVID-19 climate, gamblers are more likely to revisit venues within driving distance of their homes than to hop on planes to go to Sin City.

There is some evidence that scenario is playing out. Gaming companies with deep regional portfolios, such as Caesars Entertainment (NASDAQ:CZR) and Penn National Gaming (NASDAQ:PENN), reported strong visitation trends following the first batch of reopenings, and are highlighting improving margins.

Moody's forecast
Regional gaming operators are outpacing destination-centric rivals. (Image: Moody’s Investors Service)

Best of a Challenged Bunch

For the purposes of its report, Moody’s classifies leisure industries as cruise, hotels/lodging, gaming, and restaurants. Broadly speaking, dining isn’t dependent on travel trends on par with the other groups. As such, the research firm says it has a short time line to recovery.

The ratings agency says gaming’s time frame for a rebound to pre-pandemic levels is “medium,” and that compares favorably with the “long” and “extra long” bounce back windows for the lodging and cruise groups. Moody’s rates $87.3 billion worth of debt issued by 45 gaming entities, noting half those bonds were downgraded this year. But that’s a far better rate than the 65 percent and 100 percent clips among lodging and cruise issuers, respectively.

The credit grader forecasts casino operators’ EBITDA will decline 39 percent this year from 2019 levels, while the 2021 will be trimmed to 11 percent. Again, those figures are superior to tumbles of 70 percent and 30 percent for hoteliers, and plunges of 135 percent and 75 percent for cruise companies.

Catalysts, Risks for Gaming Operators

While casino companies stack up favorably to their cruise and hotel rivals heading into the new year, the gaming business is far from a risk-free bet.

Rising debt levels, a by-product of the pandemic when operators hit capital markets for cash, elevates default risk, which Moody’s grades at B3 today, compared with B2 at the end of 2019. The research firm says the industry’s debt burden is 15 percent higher today than it was a year ago, and that debt/EBITDA should remain around 7x over the next 12 to 18 months.

Conversely, the ratings agency is positive on casino operators’ cost-cutting moves amid the pandemic, and highlights iGaming, sports wagering and the cashless gaming movement as longer-ranging, positive catalysts for the gaming business.