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Market downturn appears to be letting up despite setbacks

31/01/2001

Analysts express optimism for casino market

The tight casino market for casino projects that has held the industry in its grip for quite some time appears to be easing. Recent successful fundraising has revealed optimism in the market, despite certain setbacks, including the collapse of two major deals.

Pinnacle Entertainment Inc. said last week its agreement to be acquired by buyout firm Colony Capital for about US$1.3 billion had been terminated. Reports indicated Colony couldn't get funding to finance the deal at a favorable rate.

Ed Roski Jr.?s attempt to buy the Las Vegas Hilton from Park Place Entertainment Corp. for US$365 million also fell apart in mid-January after he failed to secure financing.

According to Credit Suisse First Boston Corp. fixed-income analyst John Leupp the downturn can be dated all the way back to mid-2000.
"Beginning late last summer, we started to see signs that the new (bond) issues market was deteriorating pretty rapidly," Leupp said. "You had a combination of weak performance in the equity markets, and you had a lot of liquidity leaving the credit markets."

Jay Kornmayer, head of the casino finance division at Wells Fargo and Co. concurred that banks were tightened their lending for casino projects as bond markets were cooling.
"Whether you're building a casino or doing a telecom merger or whatever you're doing, the capital markets (got) much more skittish," he stated. "So (deals) had to be written very solidly."

Leupp noted that the deals had failed, not solely because of the tight market but also because of mitigating factors regarding the deals themselves.
"Each had its own different circumstances," he stated. "But the market conditions from December to today have changed dramatically. There's a greater sense of optimism overall, and there's more capital available to put to work."

Generally speaking, the industry is very healthy, and balance sheets are in about as good shape as they've ever been. The investors like the strong cash flows that are evident in gaming companies."

Although many casino operators showed disappointing fourth-quarter results, it has not deterred investors. However, the nascent credit recovery could be nipped in the bud in the months ahead if casino companies show more weak earnings in the first quarter.

"It's difficult to discern whether there's a broader slowdown occurring, and we won't know that until at least another quarter of results," says Lepp. "Until we can strip the weather effect out, it's hard to see."

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