Two high-yield sell-side analysts are maintaining a market weight on the gaming sector despite its already tight spread to Treasuries--suggesting little room for total return gains. Through last Tuesday, bonds of gaming companies traded at 395 basis points above Treasuries, compared to 463 over the curve for the Merrill Lynch U.S. Master II high-yield index. "It will be very tough for gaming to outperform the index in this hot market, but if it starts to weaken, gaming issues will be the last things portfolio managers want to part with," says John Mulkey, analyst at Bear Stearns. Mulkey also notes that the sector is 15% shorter on a duration basis than high-yield as a whole, meaning it will be less sensitive to a back-up in Treasuries.
Despite the low yields, there are still interesting opportunities in the sector, says David Hargreaves, analyst at KBC Financial Products. He recommends investors focus on issues likely to be called ahead of maturity due to their high coupons. Examples of these include the Coast Hotels 9.5% notes of '09, which were trading at a spread of 411 basis points above Treasuries last Tuesday, the Station Casinos 8.375% notes of '08, which were trading at 311 basis points over the curve, and the Argosy Gaming 10.75% notes of '09, which were 89 basis points above Treasuries. Another option would be to buy what Hargreaves calls "second-tier" names in the sector, such as issues from Ameristar Casinos, Isle of Capri or Argosy. These offer substantial spread pickup over the most creditworthy issues, such as the two senior notes offerings from Park Place Entertainment, and only slightly more risk, Hargreaves says.