While the broader equities market in the United States turned downward during the month of June 2011, the AGEM Index moved nearly equidistant in a positive direction. Although the market capitalization of 12 of the 17 publicly traded global gaming suppliers declined, the overall AGEM Index managed to rise 0.87 points, or nearly 0.8%, to 110.61 points. For comparison purposes, the Standard & Poor's 500 Index and the NASDAQ Composite both declined 0.8%, while the Dow Jones Industrial Average retracted a more modest 0.2% during the month of June.
Selected positive contributors to the index during the month included: Konami, which recorded an increase of 14.61% in its stock valuation adding 2.72 points to the index; and International Game Technology, which contributed 0.61 points to the index from a 1.97% gain in its stock price.
Despite the majority of the index members having witnessed their stock prices decline during the month of June, the amount of negative contributions to the index were primarily sourced to a few manufacturers, particularly those trading on foreign exchanges. Selected negative contributors to the index included: Aristocrat Technologies, which reported an 11.36% decline in its stock price, removing 0.98 points from the index; and Lottomatica, which contributed negative 0.80 points to the index with its stock valuation falling 4.84%.
With the global economic recovery still on unstable ground, particularly as the United States deals with its own debt load and European nations negotiate a bailout for Greece, many investors are likely taking a wait-and-see approach. Insight into confidence and investor expectations will be assisted by second quarter earnings reports being released within the next 60 days. Respecting the fact that credit ratings reflect third-party assessments about a particular company's ability to meet its future financial obligations, ratings can play a larger role. Individual corporate ratings can also affect others down the supply chain. During the last month, credit ratings from Moody's Investors Service and Standard & Poor's were adjusted for selected hotel-casino operators, providing an outlook on not only the individual companies, but the entire sector.
The recent financial performance for Las Vegas Sands, including its turnaround from the brink of financial collapse nearly three years ago, has led to a stable outlook and a rise in its credit rating to BB from Standard & Poor's. While the diversified gaming operator has more than $10 billion in outstanding debt, revenue and growth forecasts suggest the debt load is manageable. Moody's Investors Service was a little more affable, raising its rating outlook to positive with a corporate debt rating of Ba3.
Wynn Resorts Ltd. also received a boost from Standard & Poor's, who pushed the company's credit rating to BB+, which is just below investment grade (BBB). While both operators witnessed their credit ratings improve, it is largely due to the strength of their asset pools as well as international developments, particularly in the Asian gaming market where revenues have surged to new highs.
Excluding Las Vegas Sands and Wynn Resorts, credit rating agencies have not been as favorable towards other casino operators and the market in general. Moody's indicated that a slowdown in an already lackluster recovery may put further pressure on gaming companies. Operators without a plan to diversify their portfolio and capture new revenues in emerging markets may face additional challenges.
Moody's shed light specifically on the vulnerability of Caesars Entertainment (credit rating of Caa2) and MGM Resorts International (credit rating of B3). With large outstanding debt obligations at $23 billion and $12 billion, respectively, Caesars and MGM remain relatively highly leveraged within the United States and are banking on domestic revenue growth. Yet, as long-term unemployment levels remains elevated and consumer confidence continues to be fragile, many operators may experience less-than-favorable credit ratings.
While casino operators are not gaming suppliers, their credit ratings (and more importantly investor expectations) affect manufacturers by limiting accessibilty to capital and potentially raising the cost of borrowing. As long as operators have higher-than-average credit ratings, it is likely their ability to significantly invest in new technology or gaming products will be somewhat limited, further impeding global gaming operators' ability to fully recover from the downturn. (E-07.07.11)
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