Terrible News Again for Herbst and the Casino Industry

The news is terrible again for Terrible Herbst.

Standard and Poor’s Ratings Services has lowered its rating on Herbst Gaming’s 8.125 percent senior subordinated notes to ‘D’ from ‘C’, following Herbst’s failure to make an interest payment on June 1, 2008.

The bad news for casinos is not limited to Herbst properties.  Bloomberg News reports that “Casino bonds are generating the worst returns for investors as companies from Apollo Management LP’s Harrah’s Entertainment Inc. to Herbst Gaming Inc. risk bankruptcy under the weight of their debt.”

Bloomberg also reports that “Herbst Gaming, operator of 8,400 slot machines in Nevada, stopped paying interest last month, Tropicana Entertainment LLC and Greektown Casino LLC filed for bankruptcy in May and bond prices show Harrah’s and Station Casinos, which piled on more than $25 billion of combined debt in the past year to go private, are also at risk of default.”

The culprit is a deadly trifecta of sharply falling revenues and property values combined with an enormous debt overload.

According to the Nevada Gaming Control Board, casino gambling revenue on the Las Vegas Strip fell 4.8 percent to $517.5 million in March, the third consecutive monthly drop.  Similar losses were experienced in Atlantic City, the second-largest U.S. gambling center, where casino revenue fell 6.7 percent this year through April after a 5.7 percent drop in 2007.

These falling revenues come just when the casinos are committed to paying back tremendous amounts of money that was borrowed when it seemed that the good times would never end.

As Bloomberg reports, the casinos “took on a record debt load before the economy’s latest slowdown. Leon Black’s Apollo, of New York, and Fort Worth, Texas-based TPG Inc. acquired Harrah’s in a leveraged buyout in January for $27 billion.  Station Casinos, owner of 12 Las Vegas-area properties, was taken over for $8.5 billion in November by its management and buyout firm Colony Capital LLC. ‘This would probably be the most leveraged’ the gaming industry has ever been, said Michael Paladino, an analyst at Fitch Ratings in New York. ‘There’s going to be an increase in defaults’.”

“Investors from William Yung, who led Columbia Sussex Corp.’s purchase of Tropicana, to Capital Research & Management Co., the biggest Harrah’s bondholder, are being stung by losses. Debt issued by a group of 10 of the biggest high-yield gaming companies from Las Vegas to Atlantic City and Connecticut will rise to a peak of 6.6 times cash flow this year from 6.5 times in 2007, Deutsche Bank predicts. The total debt for the group will increase to $47 billion from $45 billion.”

When it came to taking on debt, the casinos gambled big.

And this time, the analysts say, the odds are against the house.

 

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