Feb 19 - Fitch Ratings believes the expected passage of online gaming in New
Jersey is a positive ratings consideration for Borgata and to lesser extent for
Caesars Entertainment Corp (Caesars). Fitch rates Borgata's Issuer
Default Rating (IDR) 'B-' with a Stable Outlook and Caesars' IDR 'CCC' with a
Negative Outlook. (Marina District Finance Company, Inc is the issuing entity
On February 7th, New Jersey Governor Chris Christie conditionally vetoed an
online gaming bill passed by the state's legislature in December 2012. The
conditional veto calls for an increase in tax rate to 15% from 10%, a 10-year
sunset provision to allow for a review of online gaming in the state and
additional safeguards. The leaders in both houses in the New Jersey legislature
stated that they plan to move forward on the revised bill on February 26th.
Important provisions untouched by the governor were the exclusivity to the
Atlantic City casinos, no limit on the type of games offered and ability to
serve non-residents (as long as they are playing within the state).
The New Jersey bill, along with other states' online gaming proposals, is
summarized in Fitch's Online Gaming Monitor (see link below). The report also
provides an overview of recent trends in online gaming and of companies that may
benefit from proliferation of online gaming in the U.S.
ONLINE GAMING A POSITIVE FOR NEW JERSEY CASINOS
The passage of the online gaming in New Jersey would be a positive for Atlantic
City market as a whole since it may help reverse the trend of New Jersey area
players choosing closer to home gambling options in Pennsylvania and New York.
Fitch expects Atlantic City casinos to experience some cannibalization from
online gaming but on a net basis incremental gaming revenues accruing to
Atlantic City casinos should still be positive when taking into account the
--ability to cross-market between physical casinos and online gaming;
--online poker's established popularity among poker players;
--ability to recapture New Jersey residents traveling to New York or
Pennsylvania to gamble; and
--the added convenience factor, which may increase session time, frequency and
speed of wagering by players.
Additionally, online gaming also has the prospect of being a higher margin
business relative to Atlantic City's land based operations, which generally have
margins below 20%. Although the following may eat into the margin upside:
--the tax rate differential (17.5% compared to land-based 9.25%);
--potential for having third-party agreements for online gaming platforms and
--initial marketing and promotional activity to ramp up the online business.
More near term, the prospect of participating in online gaming has been keeping
unprofitable casinos open in Fitch's view. In absence of online gaming, casinos
like Atlantic Club would likely close removing unneeded capacity from the city
thus relieving competitive pressure.
SOME MAY BENEFIT MORE THAN OTHERS
While Fitch believes that online gaming will be a net positive for New Jersey
casinos as a whole, some operators will benefit more than others while more
marginal participants in online gaming may see aggregate online and land based
revenues decline. The need for substantial capital to get online gaming
operational and the industry's propensity to cluster around top two or three
most competitive operators (especially in case of poker) may leave several of
the nine license holders with less than their fair share of online gaming
Fitch expects the bulk of online gaming revenue to accrue to Caesars (has four
Atlantic City properties) and Borgata, which together account for over 60% of
the city's gaming revenues and have deep player databases. Caesars and Borgata's
parent companies (Boyd and MGM) have established relationships with 888 Holdings
plc and bwin.party, respectively, which are large online gaming companies in
Europe. Other operators that may get a fair share of online gaming revenues
include Golden Nugget and Atlantic Club. The former is licensed for online poker
in Nevada and the latter is being bought by PokerStars, the largest online poker
operator in the world.
SPECIFIC BORGATA CREDIT CONSIDERATIONS
Fitch believes that online gaming is positive for Borgata although the exact
benefit is hard to quantify. H2 Gaming Capital forecasts online gaming revenues
for Nevada at $682 million in year five of implementation of all online game
types. Taking out sports betting (50% of H2's estimate) and multiplying the
estimate by three times to adjust for the difference in population equals
roughly $1 billion. If we adjust that by half to be conservative and to account
for higher than average propensity to gamble in Nevada a reasonable starting
place is approximately $500 million for online gaming potential in New Jersey.
The $500 million estimate equates to just under $75 loss per average adult in
the state and is at the low end of Wall Street estimates Fitch has seen.
Further assuming that Borgata retains 20% market share implies $100 million in
online revenue, half of which Fitch assumes will come at expense of Borgata's
land-based revenue. If Borgata generates 20% margin on this business, online
gaming could grow Borgata's EBITDA by $10 million relative to Borgata's EBITDA
of $140.5 million for the last-12 month period ending Sept. 30, 2012. Fitch
believes $10 million is conservative and there is upside to that estimate,
especially if sports betting is implemented in the state.
Fitch's 20% EBITDA margin estimate takes into account fees Borgata may have to
pay to an online gaming platform provider, which in Borgata's case could be the
partnership between Borgata's parent companies and bwin.party.
While online gaming may take a year or more to implement and several years to
ramp up, more near term the prospect of online gaming may help offset concerns
relating to the possible gaming expansion in New York. This in turn may make it
easier to refinance Borgata's 9.5% secured notes coming due October 2015
(callable at 104.75 October 2013). If the New York legislature passes an
expansion bill this session, the measure will go to a referendum this November.
Fitch sees New York gaming expansion, which may include table games at Aqueduct
and Yonkers, as the most material near-term event risk for Borgata.
For Caesars Fitch assumes 40% online gaming revenues market share, which equates
to $20 million in incremental EBITDA. Like with Borgata, Fitch's market share
assumption corresponds to Caesars' land-based market share. Fitch believes this
assumption is reasonable given the strength of Caesars' rewards program, its
World Series of Poker brand and established experience with online gaming (i.e.
for-money online gaming in Europe and social gaming in U.S.).
While not inconsequential, online gaming income from New Jersey alone will not
materially move the needle for Caesars in terms of the company's ability to grow
into its highly leveraged capital structure. On consolidated basis, Caesars has
$23.5 billion of debt and $2.0 billion of reported adjusted EBITDA for last
12-month period ending Sept. 30, 2012 for debt/EBITDA ratio of 11.8x. More
meaningful catalysts for Caesars would be a stronger recovery on the Las Vegas
Strip (40% of consolidated EBITDA) and/or federal level legalization of online
gaming (or at least poker).
For creditors, an interesting consideration is how Caesars will allocate New
Jersey online gaming EBITDA between its restricted groups and Caesars
Interactive, which is outside the two main restricted groups - Caesars
Entertainment Operating Company (OpCo; IDR rated 'CCC' with Negative Outlook by
Fitch) and the PropCo. Three of Caesars' four casinos in Atlantic City are part
of the Opco and Harrah's Atlantic City is part of the PropCo.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria Related Research:
--'Online Gaming Monitor: View of State and Federal Online Gaming Legislative
Initiatives' (Feb. 18, 2013)
--'2013 Outlook: U.S. Gaming - Return Generation in Full Swing' (Dec. 17, 2012);
--'U.S. Gaming Recovery Models -- Third-Quarter 2012' (Dec. 20, 2012);
--'U.S. Leveraged Finance Spotlight Series: Caesars Entertainment Corp.' (Sept.
--'Fitch Rates Caesars' Proposed $1.5B Sr. Secured Notes 'CCC+/RR3'' (Feb. 4,
--'Fitch Downgrades Borgata IDR to 'B-' & Sr Notes to 'B+/RR2'; Affirms Boyd &
Peninsula IDRs at 'B'' (Nov. 12, 2012).
Applicable Criteria and Related Research: Online Gaming Monitor- View of State
and Federal Online Gaming Legislative Initiatives
2013 Outlook: U.S. Gaming (Return Generation in Full Swing)
U.S. Gaming Recovery Models - Third-Quarter 2012
U.S. Leveraged Finance Spotlight Series: Caesars Entertainment Corp.