Last week's move by the Illinois state legislature to raise taxes on riverboat casino operators such as Argosy Gaming, Hollywood Casinos, Boyd Gaming and Mandalay Bay could inspire politicians in other states to push for similar legislation. That would cut into profits of these and other casino operators, says Jacques Cornet, gaming analyst at CIBC World Markets. Many riverboat casino operators have properties in several states.
Though the news from Illinois caused the riverboat bonds to rock only slightly (see high-yield roundup, page 11) Cornet fears the legislation will create a "snowball effect" in other states with budget deficits, such as Indiana, Mississippi, and Missouri. "You've got a softer economy, and in 2002 folks are up for reelection. If you are a politician and you need a way to raise money, are your constituents going to call you and say 'I can't believe you raised taxes on the casinos? I don't think so.'" He advises investors to look for bonds of Las Vegas casinos to trade inside those of the riverboat states. For example, he says Argosy's 10.75% notes of '09 (B2/B+) should trade at 325 basis points over Treasuries, as opposed to the 275 where they were last Thursday. That would be wider than the MGM Grand 9.75% notes of '07 (Ba2/BB+) which were at 280 over the curve.
Ron Bringewatt, high-yield portfolio manager at TimesSquare Capital Management, says the firm considered buying Argosy's bonds after they dropped in price early last week. However, it held off because it expects further short-term downside as more people start to worry about tax increases. Further weakness could make the firm a buyer, however. "At the end of the day, states have an interest in casinos generating revenues and profits so they can pay taxes. I don't think they're going to put them out of business."