It is barely one month before we say goodbye to 2022. All signs show that casino operators will set a new gross gaming revenue record this year. But, various experts predict that it will be tougher after that.
According to Moody’s Investors Service, the monthly year-over-year gross gaming revenue has been increasing at a steady pace. The firm also recognizes that there is still room for players to spend more money in casinos before that figure stabilizes. The research company noted that the coronavirus pandemic contributed to the demand for casino games, and the return to normalcy might slow down the growing pace.
According to Moody’s, U.S. gaming revenue growth conditions are still good. But, the growth pace is slowing down, which could mean that the industry will have tougher several months.
The research firm also explained that the inflation trend would make consumers spend more on basic needs, leaving players with much less money to spend in casinos. In fact, the persistence of the current economic challenges will affect casino earnings further.
For example, the Nevada gaming industry has generated at least $1 billion each month for the past 20 months. This is despite high inflation, skyrocketing interest rates, and macroeconomic headwinds. However, this is likely to change.
Inflation Is Weighing Down on Spending Trends
Several gaming executives have already noted that inflation has affected how much players spend at casinos. For instance, the high gas prices have reduced the number of times a player can drive to regional casinos. Also, people are not engaging in impulse spending in Las Vegas like previously witnessed.
Travel and leisure consumers have tightened their spending. The rising interest rates are also playing a part in the slow growth of the casino industry. Yet, there is no other way because the Federal Reserve must combat inflation by increasing interest rates.
The gaming industry is among the most indebted. Yet, the higher borrowing costs discourage refinancing.
According to Moody’s, the gaming operators will only be left with one option; to refinance an arduous interest rate. The research firm also noted that not many debts were maturing in the coming three years.
Yet, three U.S. gaming issuers have hefty funded debt repayment requirements until December 2025. For example, Wynn Resorts, MGM Resorts International, and Caesars Entertainment are some companies that will need to refinance a significant part of their debt when the interest rates are higher.
Moody’s Predicts Free Cash Declines
When it comes to gaming equities, investors covet free cash flow. However, this could soon change once the gross gaming revenue is suppressed by macroeconomic factors before depreciation, repayment, taxes, and interest.
Less free cash flow will affect casino operators’ ability to meet their debt obligation. This will be worrisome in case a recession happens.
The weakening economy will pressure EBITDA performance. Then, this will lead to rising rates that will cannibalize free cash flow.
If operating conditions continue to decline, capital expenses will be directed to preserving cash resources. Lastly, Moody’s predicts that the U.S. gaming issuers will turn to financial engineering transactions, also referred to as distressed exchange.
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