Slow recovery taking hold in Las Vegas: Moody's

A view of the ''Welcome To Fabulous Las Vegas'' neon sign is seen in Las Vegas, Nevada, March 27, 2010.

SAN FRANCISCO (Reuters) - Tourism to Las Vegas is on the mend and will improve slowly this year, but there will be too few visitors to fill its growing supply of hotel rooms until next year, a Moody's Investors Service report said on Thursday.

Las Vegas is the economic engine of Nevada and revenue generated by gambling and tourism in the city are critical to the state government's finances.

They have been severely weakened in recent years as Nevada's once torrid housing market went bust and as visitors to the city's casinos, resorts and hotels cut spending during the recent recession.

Moody's report noted signs of recovery in Las Vegas, including gains in visitor volumes and gaming revenues.

Still, the agency said "visitor volumes will ramp up slowly in 2011, but it will take another year for the supply of new hotel rooms to be absorbed. Therefore, the real upturn in profitability will not begin until 2012."

The report noted that Las Vegas last year faced the challenge of absorbing 4,000 hotel rooms added in 2009 and that it must now must absorb an additional 2,000 rooms that came online late last year. Additionally, another 1,000 room are slated to open later this year.

"The Las Vegas casinos have a high mountain to climb to grow earnings to anywhere near their previous peaks, as citywide hotel room rates remain below 2005 levels," Peggy Holloway, a Moody's vice president and senior credit officer, said in the report.

"Excess room supply will weigh on operators' ability to raise room rates-the second most important source of profitability for casino operators after gaming-in the near term," Holloway said.

Officials in the state capital of Carson City desperately need business in Las Vegas to improve.

Governor Brian Sandoval, sworn in last month, and lawmakers must close a $1.2 billion gap to balance the books over the next two-year budget cycle. Sandoval, a Republican, has proposed a $5.8 billion general fund budget, has ruled out tax increases and would slash spending.

Many lawmakers oppose spending cuts after severe cuts under Sandoval's predecessor, Jim Gibbons, a fellow Republican whose single term as governor was dominated by fiscal crisis.

The report by Moody's comes on the heels of actions by Standard & Poor's Ratings Services and Fitch Ratings on the Clark County School District. It oversees Las Vegas' schools, part of the fifth largest U.S. public school system.

S&P revised its rating outlook on Wednesday on the district's limited-tax general obligation bonds to negative from stable, following a similar move by Fitch Ratings on Tuesday. Fitch also cut its rating on Tuesday on $4.1 billion of outstanding district limited tax, GO bonds to AA-minus from AA, citing Nevada's financial troubles.

(Reporting by Jim Christie; Editing by Kenneth Barry)