Hurricane Sandy Hits Gaming Cos Hard
November 1, 2012
Hurricane Sandy may cause investors to reconsider how much credit they extend to some gaming companies with operations in Atlantic City.
Even before the storm made landfall Monday evening, the Atlantic City gaming market had been suffering a steady loss of revenue thanks to competition from newer and more convenient facilities in neighboring states such as Pennsylvania and New York.
Now the area is severely flooded, residents have been evacuated by order of New Jersey Governor Chris Christie, and all casinos have been closed until further notice.
In research published Oct. 31, Moody’s Investors Service said this is likely to result in a meaningful loss of revenue and earnings over the short term, something many casino operators in regions affected by the storm cannot afford.
While casino losses resulting from Hurricane Sandy should be paid for by insurance proceeds, Moody’s said that, based on past experience, it could take a substantial amount of time for these payments to be made, and insurance coverage might not be adequate to cover the losses incurred by this type of a major flood.
Moody’s identified the gaming issuers most at risk from the damage caused by Hurricane Sandy as Revel Atlantic City, owner of Revel Resort, Atlantic City’s newest casino, and Marina District Finance Co., owner of Borgata Hotel Spa and Casino.
Caesars Entertainment and Tropicana Entertainment also have operations in Atlantic City that were impacted by the hurricane, but unlike Revel and Marina District Finance, they also own and operate a number of casinos outside of Atlantic City, so the loss of revenue won’t have as significant of an impact on their bottom lines.
Revel is rated Caa2 by Moody’s; it was already on review for a possible downgrade before the hurricane struck. In August, the ratings agency said it was concerned about “a significant shortfall in the company’s revenue and earnings” at Revel Resort, which is the company’s only casino and had just opened on May 25.
In its latest report, Moody’s said the damage and financial ramifications of Hurricane Sandy could worsen Revel’s already weak liquidity if the property remains shut for an extended period of time and insurance proceeds do not arrive on time.
“In addition, we are concerned that Revel may not be able to restore its operations to pre-flood levels once the casino reopens because of the potential that the economic impact of the flood will persist, negatively affecting the regional economy and gaming demand,” the ratings agency said.
Standard & Poor's also downgraded Revel’s issuer rating in August, to CCC from B-, with a negative outlook. It also lowered its rating on Revel’s $900 million senior secured term loan, to CCC from B. Like Moody’s, S&P was concerned about weak initial operating results. “A strong opening for the Revel Resort was critical to the company's ability to ramp up cash flow generation to a level sufficient to service its capital structure,” it said in a research note.
S&P also said Revel might not be able to meet financial maintenance covenants on its term loan that will be measured beginning in the June 2013 quarter, forcing it to negotiate an amendment with lenders. And that was even before the storm.
Like Revel Atlantic City, Marina District Finance has only one asset, the Borgata Spa Hotel and Casino. The company is rated B2 by Moody’s with a stable outlook. In its Oct. 31 report, the ratings agency said the negative earnings impact of the storm will be “meaningful” in the short term and may force the company to seek a covenant amendment or waiver to ensure that it doesn’t trip the minimum Ebitda covenant requirement contained in its bank agreement.
While Moody’s has decided not to change Marina District Finance’s ratings or outlook at this time, the company remains vulnerable to a rating or outlook change if it appears a covenant problem will occur and/or the damage from the hurricane to Borgata will have long-lasting effects that will negatively affect the company’s liquidity and/or weaken Borgata’s competitive position relative to resort casinos in neighboring jurisdictions that were less affected by Hurricane Sandy.
However, S&P downgraded Marina in August, even before the storm, to B from B+ with a stable outlook. The ratings agency also lowered its rating on the company’s senior secured notes due 2015 and 2018, to B+, one notch above the corporate rating, from BB-.
It cited weaker-than-anticipated operating performance in the second quarter at Borgata, and its belief that second half performance will be challenged by a softening economy and additional competition, causing leverage, adjusted for operating leases, to reach the mid-6x area in 2013.