Gaming and travel investors and analysts say they are hard-pressed to find credits they can recommend, as many names are trading at higher prices than they were before Sept. 11. John Maxwell, gaming and lodging analyst at BNP Paribas, says that pricing in the sector reflects investors' willingness to overlook weak operating numbers through at least the first quarter in an attempt to be fully invested by year-end. Given that benchmark credits such as the MGM Mirage 8.375% notes of '11 (Ba1/BB+) were yielding 8.5% last Tuesday, the only two credits in which he sees value are Pinnacle Entertainment and Royal Caribbean Cruises. While Maxwell does not yet have a buy recommendation on Pinnacle, he sees little downside risk in the 9.25% notes of '07 (Caa1/B-), which were trading at 88 last Tuesday. He believes investors have already factored weak operating performance numbers into the price of the bonds. Also, he believes Pinnacle may be looking for a joint partner to fund a property it is struggling to complete in Lake Charles, La. If it were to find such a partner, he says the bonds would trade up five points.
Maxwell also believes the Royal Caribbean 8.75% notes of '11 (Ba2/BB+) should at least maintain their dollar price of 84, as he says the company has adequate liquidity to get through the downturn. He believes a stronger economy, coupled with regulatory approval for its merger with P & O Princess Cruises (Baa3/BBB), would cause the Royal Caribbean bonds to rally five to 10 points.
Eric Misenheimer, portfolio manager at Northern Trust, says his firm has almost entirely sold out of its positions in the gaming and travel sectors. He believes the sectors are well overbid, and are vulnerable to weakness if the economic slowdown continues. He says his firm is not motivated to invest in the sectors in spite of the widely held belief that portfolio managers must be fully invested by year-end. He notes that since the most transactions cost between half a point and a full point given the bid/ask spread, it is impossible to boost year-end returns without taking on extreme risk.