Betting on the
Commercial Gaming Sector
More states betting on legalized gambling to create revenue; regional gaming facing compression
An increasing number of states want to provide gaming options to their residents rather than see them head to adjacent states to gamble, leading to the recent expansion of the gaming industry. Steve Epperly, Senior Director, CIT Corporate Finance, Gaming, offers his outlook on gaming industry trends and opportunities.
Q: How significant of a role does gaming play in state budgets?
A: It varies from jurisdiction to jurisdiction. Obviously, it’s the main driver of the economy in Nevada, which has the lowest tax rate of any jurisdiction in the country. The expansion of gaming over the years, when states have seen revenue leave their borders for neighboring states where gaming is allowed, has increased the propensity for these states to legalize it themselves to keep the revenue at home. To put this in perspective, there were a couple of months in 2013 where the 12 Pennsylvania casinos collected more monthly gaming tax than the 300 casinos in Nevada did, in the same time period.
As a result, Pennsylvania has put pressure on Atlantic City, as well as the Connecticut casinos, which provide roughly 25% of the state’s budget revenues. States are interested in keeping this revenue within their own borders, and this is what has led to the expansion of gaming as states look to grow their revenue bases.
Q: How has the gaming sector evolved over the past five years?
A: There’s been a number of new jurisdictions that have come online in Ohio and Maryland for example, and Massachusetts and New York are in the process. There are a number of other markets where they’ve increased the number of casinos, or changed some of the regulations to allow for more or different types of games. The casino and gaming sector is looking for ways to grow itself and reinvent itself, but we’re also starting to see some cannibalization in what used to be pretty exclusive markets.
The legalization of gaming and the opening of casinos in Ohio are starting to put revenue compression on Illinois and Michigan.
Q: How is the online gambling market impacting traditional casinos?
A: Legalized online gaming is in its infancy and is currently restricted to intrastate gaming, which means the licensee can only conduct online operations within the border of the state in which its license was issued. This severely limits the pool of players. Sometime in the future, as online gambling begins to become more prevalent, we would expect it to become interstate and regulated at the Federal level, which will increase the liquidity of the games, the number of players and the pools. Generally speaking though, it’s been very underwhelming considering the limited rollout to date.
Q: Are there benefits to Federal legislation regulating online gaming?
A: Online gaming will roll out slowly, on a state-by-state basis, likely under the regulatory framework already established in these states for traditional land-based gaming.
Growth in online gaming will reach a tipping point when a critical mass of states approve the activity and then enter into interstate compacts that pool gamers in these states together, similar to those agreements that govern multistate lotteries such as Powerball.
Q: Where do you see demand for financing in your sector?
A: There are a lot of maturities and obligations coming due over the next few years. There are roughly 33 commercial operators with obligations coming due within the next two and a half years. Nearly half of those dollars are going to either mature or have to be refinanced before the end of 2018. That’s a significant amount. When this debt starts coming due, dependent upon the shape of some of these markets, it could potentially be at a higher cost to the operator, creating a leverage increasing event.
Q: What is the casino and gaming sector using financing for today?
A: The sector is using financing for expansion, greenfield project finance and acquisitions. We’re seeing some of the larger operators shed some of their non-core properties which is creating opportunities for smaller, less diversified companies to pick up new businesses and diversify themselves. We’re also seeing needed financing for new projects that are coming online in newly created jurisdictions like Massachusetts, Ohio, and Maryland.
Q: In which markets do you see the most growth?
A: I see continuous growth in Ohio, where there are still a few casinos to build, and Maryland (although the market is ramping up slower than expected). Massachusetts is a completely new market that’s densely populated where most of its gamers are currently going to Connecticut, Rhode Island or New York. So towns like Boston need to find a way to keep revenue within their borders. Pennsylvania, on the other hand, has been a huge market since it opened up and is now starting to level off.
Q: What’s your outlook for the sector?
A: We’re going to continue to see the rebound take hold in Nevada, particularly Las Vegas, which is growing and seeing new investment in the market with new openings of properties and expansions. We’re going to continue to see softness in the regional markets, like the Midwest and upper Midwest. I think a lot of uncertainty still exists about the economy. The lower end gambler -- which is the staple for a lot of these markets -- is just not doing it as much and as frequent. They’ve been hurt by the lifting of the payroll tax holiday rolling off, and the uncertainty around healthcare reform. I think all those things are creating a drag in a lot of the regional markets.
Q: Where are there opportunities in the market today?
A: Those companies that were able to diversify and build a presence in Asia are doing quite well.
Macau by itself does almost $40 billion a year in revenue, as compared to Las Vegas, which does closer to $8 billion. In Singapore you have two casinos that may likely generate more revenue than all of the Las Vegas strip casinos combined.
The Asian population has a very, very high propensity to game, and within Macau there’s close to 2.5 billion people within a 90 minute flight of the casinos.
Japan could potentially be the next big market as the legislature works to pass legislation to have casinos built by the time the Olympics arrive in 2020.
Macau by itself does almost $40 billion a year in revenue, as compared to Las Vegas, which does closer to $8 billion. In Singapore you have two casinos that may likely generate more revenue than all of the Las Vegas strip casinos combined.
The Asian population has a very, very high propensity to game, and within Macau there’s close to 2.5 billion people within a 90 minute flight of the casinos.
Japan could potentially be the next big market as the legislature works to pass legislation to have casinos built by the time the Olympics arrive in 2020.
The biggest opportunity for CIT in both the commercial and Native American sectors will be related to refinancing activity, particularly bank loan-for-bond take-outs. We also expect to see continued loan demand in the Native American gaming sector from expansions on better performing Native American casinos.
On the commercial side, loan demand will also be driven by M&A activity and refinancing.
