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Digging Out

Reducing debt isn't sexy, but it's necessary to regain investors' confidence.

Digging Out

For most gaming investors, growth is the sexy part of any business story.

People want to see new casino projects, and read about gamblers dropping ever-larger sums of money on the casino floor and cash customers paying ever-rising prices to stay in hotels, see shows and dine out.

But one of the most important trends today is in the often-dark and complex world of debt.

Simply put, companies are digging out from under the huge debt burdens piled up to finance that sexy growth, or to be bought out by private capital.

This digging out is a long, slow process. Debt simply isn’t repaid rapidly. And many times, it isn’t repaid at all. Companies extend the dates when debt is due with the hopes they can grow cash flow so that debt service becomes a smaller percentage of their expense base.

In other cases, companies refinance debt to avoid the day of reckoning when the loans come due, but at the price of higher interest rates—a devilish kind of deal that not only just kicks the can down the road, but raises financial risk by increasing the cost of doing business with no benefit to its share-holding owners other than the postponement.

Any investor looking to buy the stock of a casino company needs to look at the debt, how it is structured and the interest rates paid, not just the opportunity for revenue growth.

Among the companies that are doing more than refinancing debt is Las Vegas Sands Corporation.

LVS recently announced that it is buying back $189 million in debt at a savings to shareholders of $12 million.

That’s less than 2 cents-a-share savings, but it is 2 cents saved forever, or at least until the company decides to raise debt again.

Additionally, LVS is generating so much cash that shareholders expect to benefit in many ways, whether through the initiation of dividends, buying back shares, financing growth or reducing debt.

Perhaps Ameristar has done the best job of balance sheet management.

It’s not a new story in that its restructuring was done last spring when the company refinanced and actually raised debt to buy out the majority ownership of the Craig Neilsen Foundation.

The result: the number of shares reduced from 59 million to 34 million and lower interest expense as the blended rate was cut from 6.7 percent to 5.4 percent.

Since then, ASCA has put increasing cash flow to work paying down debt and buying in shares, both of which add value to shareholders.

ASCA is increasing its annual dividend payout from 42 cents to 50 cents a share.

All of this has been accomplished in an era of flat casino revenues.

Now, ASCA is positioned to grow again, looking first at under-performing properties where it can apply its managerial skills at raising margins, then competing for one of the Massachusetts casino licenses.

As CEO Gordy Kanofsky has noted, western Massachusetts is larger and wealthier than St. Louis, where ASCA has its largest property, and it would have the market to itself, compared to the five operators that share greater St. Louis.

As for purchasing properties, we don’t know where ASCA is looking, but we note that Caesars Entertainment (CZR) has not publicly denied speculation that it is shopping around some Central Division properties. Caesars’ Harrah’s Metropolis near Nashville or Horseshoe Southern Indiana near Louisville strike us as properties that fit the Ameristar model.

In the spirit of this column, property sales could go to reduce CZR’s hefty debt.

There’s A Lot More Than Coffee In Brazil

A short time ago, President Obama announced an initiative that could prove very important for casino operators in Las Vegas and, perhaps, South Florida.

He wants to encourage visitation from China and Brazil by liberalizing visa and other rules. Gaming investors have long known about the growing value of Chinese gamblers on the Las Vegas Strip. The growth of baccarat into the No. 1 table game revenue generator isn’t because of Aunt Tilly from Keokuk. Thus, making it easier for the ever-growing numbers of Chinese travelers to visit the U.S. is an obvious benefit to casinos.

But another source of potential revenue is Brazil, Latin America’s largest and fastest-growing economy. Consider: The Brazilian middle class has grown by 40 million in recent years. The number of millionaires is expected to triple by 2020.

And they spend. The average Brazilian spends $5,400 on a trip to the United States. That compares to $4,300 for the typical Japanese. The stories of Brazilians spending $100,000, even $250,000, on South Florida shopping trips have become almost old news.The percentage of that spending ending up in casinos is probably fairly small. But the Las Vegas Convention and Visitor’s Authority intends to market to Brazil. And the development of resort-style casinos in South Florida could turn the trickle into a stream.

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