Street Gaming Pros See More Supply, Solid Demand For Paper
Gaming watchers are expecting up to five new issues from the sector over the next couple of months, bringing possibly as much as $1 billion in paper. Boyd Gaming announced a $200 million senior bond offering last Thursday, and high rollers believe three or four others are either planning an offering or weighing the market. Buysiders have shown a strong appetite for the paper: gaming paper traded 200 basis points wide of the high-yield average in the middle of 1997, and has steadily improved to its present position, approximately 280 basis points inside of high yield, according to Eric Matejevich, gaming analyst at Merrill Lynch. Gaming has been seen as a recession-proof industry because most M&A in the sector dried up early last year, leaving companies with strong free cash flow. While some investors are questioning that view since a recent earnings miss by Harrah's Entertainment, others remain eager for a place at the tables. Jacques Cornet, gaming analyst at CIBC World Markets, thinks the secondary market can handle $1 billion over two months without significant spread widening.
Tom O'Reilly, analyst and portfolio manager at Lincoln Capital Management in Chicago, Ill., expects Argosy Gaming to announce a deal in the $200-300 million range to finance the acquisition of Horseshoe Joliet as soon as the acquisition receives regulatory approval. Morgan Stanley Dean Witter is expected to be the underwriter. A call to John Orem, the high-yield banker at Morgan Stanley believed to be working on the deal, was not returned, and a spokeswoman did not respond to questions by press time. Argosy executives did not return calls.
Other gaming companies with clear financing needs include Mohegan Tribal Gaming Authority, which must make additions to existing property, and Mandalay Resort Group, which has bank debt maturing shortly. Executives at those companies did not return calls.
O'Reilly and other pros expect Argosy to issue its bonds at about a 9% coupon for a 10-year deal. O'Reilly says he'll buy at that price, due to Argosy's strong management and because its casinos are well located. However, he says other companies, which he declines to name, will have to come down in price as a result of the Harrah's announcement. He says Lincoln reduced its allocation to the sector after the announcement, but maintains an overweight position, noting that the Harrah's 778% notes of '05 fell from $102 to $100.5 after the announcement, but had rebounded to $102 as of Wednesday.
However, not all investors are ready to roll the dice. Eric Misenheimer, portfolio manager at The Northern Trust Company in Chicago, sees the Harrah's miss as a sign that gaming paper is ready to crap out. He notes that the bellwether MGM Mirage 838%s of '11 fell to par from $101 after the Harrah's announcement, which he says is a significant fall for such a stable credit. "Gaming could potentially be a very bad place to be in the fourth quarter," he says.