Financial Stability and Casino Debt

Casino operators have always borrowed money to construct and improve their resorts. Beginning in 1999, however, the Las Vegas-based companies that dominate gambling in Nevada and many other jurisdictions began taking on unprecedented levels of debt. This debt load escalated from 2005 to 2009, and, though it has since leveled off, it has left casino operators more highly leveraged than ever before. Companies with such high levels of debt have consequently high interest payments, which leads to less money available for capital investment; it also makes them susceptible to default, should revenues weaken (as casino revenues did from 2008 onward). When extreme leveraging impacts a casino’s financial performance and viability as a going concern, it may become a legitimate area of interest for regulators. Recently, MGM Resorts International announced plans to issue $500 million in unsecured debt—not to pursue an expansion opportunity, but to pay down existing debt. Added to the company’s existing $13.45 billion debt, the new issue will increase MGM Resorts’ indebtedness to nearly $14 billion. With a market cap of $5.8 billion, MGM has a debt/capitalization ratio of approximately 240%.1 Companies this highly leveraged (and with correspondingly high interest costs) are extremely sensitive to fluctuations in cash flow, and the past several years have proven that casino gaming, while it is still an industry with high profit potential, is prone to fluctuations in cash flow due to changes in consumer spending and competition from new jurisdictions. The historic levels of debt that many casino companies have taken on may threaten the future stability of individual companies and the gaming industry as a whole