Worst-case scenario: Cascade failure?

Written by Bill Toland on .

Here's a question that's probably keeping Luke, Dan and Ed (well, maybe not Ed) up at night -- what happens if Rivers Casino doesn't survive? Or, more to the point, what if Rivers can't meet its agreed-upon payments to the city and Consol Energy Center?

Could the casino actually fold? Doubtful. Then again, casinos do close all the time. Little riverboat ones. Medium-sized "convenience" ones. Big ones, too. In the last 15 years or so, Vegas alone has lost the Aladdin, the Dunes, the Desert Inn, the Hacienda, the Landmark, the El Rancho, the Sands and the Stardust. In Vegas, if one casino is being imploded, another is being built down the street -- but in Pennsylvania, it won't work that way. Building a new casino is a 2-3-year process under the legislative framework that now governs the awarding of casino licenses (and the operation of the casinos themselves). Long story short, the gaming board bet on The Rivers. We built the Rivers. So now we're stuck with Rivers, and only the Rivers, for decades, barring a change to the number of casinos allowed in the city (right now, the limit is one).

So, back to Rivers' finances. Less than a year after opening, the casino was forced to restructure its debt:

Chicago billionaire Neil Bluhm is pouring more money into the Rivers Casino. Mr. Bluhm, who rescued the project from near bankruptcy in 2008, is among a group of existing investors that plowed another $108 million into the casino in a bid to firm up its financial footing. The casino also restructured debt to address financial concerns and credit downgrades precipitated by lower-than-expected slots revenues at the North Shore venue. In an announcement Wednesday, the casino said the recapitalization would reduce its senior debt by more than 45 percent and result in "improved financial stability." ...

... The moves failed to impress one New York rating agency that has raised concerns about the casino's ability to meet debt service payments and other obligations, including the $7.5 million annual contribution to help pay for the new arena, based on the slots revenues it was generating. In an update released hours after the Rivers announcement, Standard & Poor's downgraded the rating of casino affiliate Holdings Gaming Borrower from CCC to SD, or selective default. It marked the third downgrade since the casino opened in last August. Standard & Poor's stated it viewed the buy back of some of the senior debt and the accompanying restructuring of other obligations as "tantamount to a default," given the "distressed financial condition" of the company. The rating agency said it still had concerns about whether the moves would be enough to enable the casino to meet debt and other obligations in the future given its current operating performance.

That "Selective Default" rating is no joke: "An obligor rated 'SD' (Selective Default) or 'D' has failed to pay one or more of its financial obligations (rated or unrated) when it became due ... An 'SD' rating is assigned when Standard & Poor's believes that the obligor has selectively defaulted on a specific issue or class of obligations but it will continue to meet its payment obligations on other issues or classes of obligations in a timely manner."

What are the Rivers' payment obligations? They are many, and Chris Briem connected the dots a few months ago:

"Everything comes back to the revenue-generating capacity of the casino. Harrisburg has forced the universities to wait for money only to flow from the prospective table games; the SEA depends on casino payments to fund the arena bonds; as bad as the city's finances seem to be now and into the future, they depend ever more on ongoing payments from the casino directly into city coffers on top of everything else. And finally the state, which the city will look to as a last resort, is stuck backing up payments to the SEA from the casino to pay for the bonds building the arena ...  I sense the potential for a cascade failure."

But at least they got Paul McCartney to play the arena opener, right?

... Looking forward, you wonder what will happen if this, or any other casino, folds its hand in Pennsylvania. I mean, these casinos won't survive into eternity. But with so much state revenue, current and future, riding on the success of these casinos, it can't be in Pennsylvania's best interest to reboot the process when a property runs out of cash. That is to say, to throw the process open to all-new bidders -- with a new round of background checks, public hearings, traffic reports -- would take forever, and the state certainly won't want a two-year gap in revenues. So will it just continue to allow new investors for the same properties, without the elaborate vetting? Neil Bluhm already rescued this project once -- if Don Barden failed, and Neil Bluhm does too, will anyone be crazy enough to take over the operation a third time? Or do they just go bankrupt, shed debt, let Neil Bluhm's group dump more of his m/billions into the property, leaving the SEA and state holding the bag?

And hypothetically, if there is no private bailout, what happens then? Maybe it could become a ward of the state, like GM or the liquor stores. Heck, why not? Just let the Pennsylvania Lottery run the thing.

Then again, maybe the whole thing becomes moot in a few years -- the new governor decides that we need 24 casinos, the cash-starved Legislature agrees, and then we don't have to worry about one teensy bankruptcy so much.

... It's all speculation, I know. Perhaps the end of the recession will slowly boost machine revenues. Or maybe table games will finally get a new crowd to show up -- a crowd that not only prefers roulette to slots, but also spends more liberally on expensive cocktails and steak dinners. Perhaps in a year or two, all of us will stop wondering whether the casino would have performed better in Station Square or the Lower Hill, rather than sitting under the West End Bridge, and will stop questioning how the revenue forecasters seem to have botched their numbers so spectacularly in some cases.

But surely table game revenues will eat into slots play. And with table games come dealers, which means payroll presumably goes up (the profit margin on slots revenue is more than double that of table games). Atlantic City worries that table games in eastern Pennsylvania will steal as much as 20 percent of New Jersey's $1.2 billion in table games revenue. Pittsburgh will probably win back some of the gamblers who drive to West Virginia to play table games and poker there, but will it be enough? Or do all those well-paying casino jobs (with benefits) quickly become lower-paying jobs, without those nice benefits? Something's gotta give. Either the casino starts making more, or the people getting paid by the casino (debtors, employees) start getting less. Those are your two options right there.

I also wonder how well Rivers is doing on the amenities side of the equation. A casino gets 10-25 percent of its revenue (or more, if it has a hotel) from non-gaming revenue like food and booze. Last time I was at the Rivers, neither the restaurants nor the Drum Bar was terribly crowded. And Rivers doesn't have a hotel, either. And don't look now, but Ohio is opening its casinos in the next few years.

In the end, I guess, Rivers survives because it is Too Big To Fail -- but at what cost to everyone else?

Notes from the Border

Hot of the presses, via The Columbus Dispatch:

Lawmakers this morning adopted hundreds of rules governing the operation of Ohio's future casinos. The final legislation left out a requirement that casino developers submit annual diversity plans, which had emerged as the last major sticking point in negotiations between the Republican-led Senate and Democrat-run House.

It also carves up half of the $200 million in licensing fees expected from casinos in Columbus, Cleveland, Cincinnati and Toledo. The House had wanted to earmark the entire amount, while the Senate wanted to deal with the matter later. The final bill also splits the money between urban and rural areas, rather than focusing on cities as the House had proposed. So-called games of skill that resemble slot machines will be regulated by the new Casino Control Commission rather than the attorney general's office, although the rules governing their operations will not change.

That skill games provision was a bit controversial, because those are the same "skill" games that are in grocery stores and mom-and-pop bars across the state. Right now ther aren't regulated by the state, but soon they will be. Can the mom-and-pop shops afford the new payout rates and licensing fees, which are likewise to be set by the state?

... If New Jersey can't get Pennsylvanians to come to its casinos anymore, maybe it can get its natives to bet online?

"New Jersey [may] very well be the first US state to legally offer online gambling to the people that live there. New Jersey state senators released a bill from committee that would allow casinos to introduce internet websites for poker and other casino games."

This bears watching. We'll keep an eye it.

Odds and Ends

Isle of Capri turns a fourth-quarter profit ... The Washington Post gives the "Christmas City" (Bethlehem, Pa.) the full travel-story treatment, on account of the new casino there ... Gambling in the Bay State ... Will Delaware expand the number of casinios in the state?

The Patriot-News editorializes on Philly's casino woes:

"Pennsylvanians were told support for legalized gambling would mean property tax relief. [But] Foxwoods Resort Casinos in Philadelphia, has not moved past the planning stage in the last four years because of money issues, opposition to its location and concern about creating another casino in Philadelphia. ... This has gotten caught up in Philadelphia politics and mired by financial issues and opposition for far too long. It is time to move on. The bottom line is that taxpayers deserve to know there is a reasonable prospect of a casino being built for their tax benefit. Right now that is not the case with Foxwoods."

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