vk.com/id446425943
Goldman Sachs
Credit Outlook
Gaming: Komal Patel
Sector View:
We maintain our Neutral coverage view on the sector as we see gaming as a cyclical industry that tends to move with the broader HY market. Year to date, the sector has underperformed the market by ~35bp but continues to trade tight, yielding 6.75% vs. the market at 7.4%. We think valuations were pushed wider after a volatile 2Q earnings season and some investor concerns around rising interest rates, elevated leverage, potential weakness in the Chinese consumer/trade tensions, and end of cycle fears. However, we see continued macro strength with GDP expected to grow 2.9% FY18E, unemployment remaining low at 3.8% FY18E, and low likelihood of an economic recession, per GS economists. Management teams also noted wage inflation is supporting gaming spend and group bookings are tracking well heading into 2019. Furthermore, limited new hotel room supply and growth from incremental convention space should support RevPar trends. M&A activity remains elevated in the industry, especially as operators utilize gaming REITs to help fund acquisitions (by selling underlying real estate assets).
Regionally, we view Las Vegas as an area of modest positive growth with continued emphasis on non-gaming amenities. Macau growth is driven more by the mass market segment given a slower VIP segment. New capacity, attractions and infrastructure coming online also continue driving growth in Macau. Among the major gaming operators, we prefer Wynn Resorts (OP) to Caesars (IL) and MGM International (IL) as we see moderate (consolidated) leverage, benefits from further ramp up at Wynn Palace, and potential positive catalysts in Massachusetts. Caesars’ consolidated leverage remains high in the 6x range with more medium-term deleveraging plans and weaker performance in Las Vegas, though strategic actions at the company could bring upside. We believe MGM trades tight with increased cash generation directed to shareholders.
We view the gaming REITs as largely stable businesses, defined by their predictable cash flows, favorable rent escalators, manageable leverage and attractive corporate rent coverage and guarantees. Drivers for stepped up acquisition activity include portfolio growth, tenant diversification and geographical expansion. We are incrementally more positive on VICI’s credit story following favorable lease modifications, several property additions and a solid commitment to its leverage target of 5.0-5.5x, however the bonds are high coupon/high dollar and currently trading YTC.
4 December 2018 |
26 |
vk.com/id446425943
Goldman Sachs
Credit Outlook
Exhibit 55: HY Gaming vs Broader HY Market
8.00% |
7.00% |
6.00% |
5.00% |
4.00% |
3.00% |
Yield Book Gaming Index |
|
Yield Book HY Broad Market |
|
Exhibit 56: Gaming bond comparables
|
Issuer |
Coupon |
Maturity |
Ratings |
Price |
YTW |
Z-Spd (bp) |
|
CGPHLC |
5.250% |
10/15/2025 |
B3/B- |
$92.25 |
6.723% |
375 |
|
VICI |
8.000% |
10/15/2023 |
B1/BB |
$109.13 |
4.693% |
171 |
|
MGM |
5.750% |
6/15/2025 |
Ba3/BB-/BB |
$99.13 |
6.007% |
304 |
|
MGP |
5.625% |
5/1/2024 |
B1/BB- |
$100.75 |
5.569% |
260 |
|
WYNNLV |
5.500% |
3/1/2025 |
B1/BB- |
$95.81 |
6.409% |
344 |
|
WYNNMAC |
4.875% |
10/1/2024 |
B1/B+ |
$91.25 |
6.769% |
380 |
|
NUGGET |
8.750% |
10/1/2025 |
Caa1/CCC+ |
$100.50 |
8.665% |
569 |
|
JACFIN |
10.250% 11/15/2022 |
Caa3/CCC |
$109.13 |
6.062% |
313 |
|
|
MOHEGN |
7.875% |
10/15/2024 |
B3/B- |
$96.25 |
8.815% |
585 |
|
RIVPIT |
6.125% |
8/15/2021 |
B2/B |
$99.25 |
6.738% |
375 |
|
RRR |
5.000% |
10/1/2025 |
B3/B- |
$91.88 |
6.540% |
357 |
|
SGRHSE |
5.875% |
5/15/2025 |
B3/B- |
$94.00 |
7.099% |
413 |
|
YieldBook Gaming Index |
|
|
|
6.532% |
|
|
|
YieldBook BB Index |
|
|
|
5.882% |
|
|
|
YieldBook B Index |
|
|
|
7.525% |
|
|
|
YieldBook HY Market |
|
|
|
7.249% |
|
|
Source: Goldman Sachs Global Investment Research, The Yield Book Inc, FTSE Index Source: Goldman Sachs Global Investment Research, Bloomberg, The Yield Book, FTSE Index
Exhibit 57: Recent Entity Level M&A
Valuesinmillions |
|
|
|
|
|
|
Date Announced |
Date Closed |
Acquirer |
Target |
Total Purchase Price |
LTM EV/EBIDTA |
Expected synergies (% of deal) |
14-Nov-18 |
Pending |
Penn National Gaming |
Greektown Casino-Hotel Opco |
$300 |
6.3x |
NA |
29-May-18 |
Pending |
MGM Resorts International |
Empire City Casino Opco |
$225 |
6.0x |
NA |
26-Apr-18 |
Pending |
Waldorf Astoria |
Mandarin Oriental Las Vegas LLC |
$214 |
31.0x |
NA |
16-Apr-18 |
Pending |
Eldorado Resorts, Inc./GLPI |
Tropicana Entertainment Inc. |
$1,850 |
9.6x |
2.2% |
16-Jan-18 |
Pending |
Caesars Entertainment Corp. |
Centaur Holdings LLC |
$1,700 |
12.1x |
11.2% |
18-Dec-17 |
Expected 2Q18 |
Penn National Gaming |
Pinnacle Entertainment Inc |
$2,800 |
9.2x |
3.6% |
19-Nov-16 |
1-May-17 |
Eldorado Resorts |
Isle of Capri Casinos |
$1,700 |
8.8x |
2.1% |
12-Dec-12 |
14-Aug-13 |
Pinnacle Entertainment |
Ameristar Casinos |
$2,800 |
8.4x |
1.4% |
12-Mar-06 |
3-Jan-06 |
Columbia Entertainment |
Aztar Corporation |
$2,100 |
12.5x |
NA |
16-Jun-04 |
25-Apr-05 |
MGM Mirage |
Mandalay Resort Group |
$7,900 |
8.9x |
NA |
|
|
|
Mean: |
$2,159 |
11.3x |
4.1% |
|
|
|
Median: |
$1,775 |
9.1x |
|
|
|
|
High: |
$7,900 |
31.0x |
|
|
|
|
Low: |
$214 |
6.0x |
|
Source: Goldman Sachs Global Investment Research, Company Data
Exhibit 58: Recent Property Level M&A
Valuesinmillions |
|
|
|
|
|
|
Date Announced |
Date Closed |
Acquirer |
Target |
Total Purchase Price |
LTM EV/EBIDTA |
Price per sq. ft of gaming space |
14-Nov-18 |
Pending |
VICI Properties |
Greektown Casino-Hotel RE |
$700 |
12.6x |
|
12-Jul-18 |
Completed |
VICI Properties |
Octavius Tower Real Estate |
$508 |
14.5x |
- |
29-May-18 |
Pending |
MGM Growth Properties |
Empire City Casino Real Estate |
$625 |
12.5x |
$3,906 |
5-Apr-18 |
Pending |
MGM Growth Properties |
Hard Rock Rocksino |
$1,063 |
10.6x |
$5,315 |
8-Mar-18 |
Pending |
Wind Creek Hospitality |
Sands Casino Resort Bethlehem |
$1,300 |
8.8x |
$9,353 |
20-Feb-18 |
Pending |
Churchill Downs |
Presque Isle Downs / Lady Luck |
$230 |
8.2x |
$3,147 |
18-Dec-17 |
Pending |
Boyd Gaming |
4 Pinnacle assets |
$525 |
6.3x |
$1,859 |
10-May-16 |
3-Oct-16 |
Red Rock Resorts |
The Palms |
$313 |
8.8x |
$3,295 |
25-Apr-16 |
20-Dec-16 |
Boyd Gaming |
Cannery Casino |
$230 |
7.2x |
$2,875 |
21-Apr-16 |
27-Sep-16 |
Boyd Gaming |
Aliante |
$380 |
22.2x |
$3,040 |
31-Mar-16 |
1-Aug-16 |
MGM Resorts |
Borgata Hotel & Casino |
$900 |
8.5x |
$5,590 |
14-May-14 |
12-Sep-16 |
Pinnacle/GLPI |
The Meadows Racetrack & Casino |
$440 |
9.0x |
$2,444 |
16-Aug-13 |
1-Apr-14 |
Tropicana Entertainment Inc |
Lumiere Place Casino & Hotels |
$260 |
7.5x |
$3,467 |
29-Mar-13 |
17-Jul-13 |
Oxford Casino |
Churchill Downs |
$160 |
7.5x |
- |
Mean: |
$545 |
10.3x |
Median: |
$474 |
8.8x |
High: |
$1,300 |
22.2x |
Low: |
$160 |
6.3x |
Source: Goldman Sachs Global Investment Research, Company data
4 December 2018 |
27 |
vk.com/id446425943
Goldman Sachs
Credit Outlook
Exhibit 59: Gaming expenditures are highly correlated with GDP
growth |
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30.0% |
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25.0% |
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20.0% |
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15.0% |
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10.0% |
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5.0% |
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0.0% |
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-5.0% |
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1970 |
1971 |
1972 |
1973 |
1974 |
1975 |
1976 |
1977 |
1978 |
1979 |
1980 |
1981 |
1982 |
1983 |
1984 |
1985 |
1986 |
1987 |
1988 |
1989 |
1990 |
1991 |
1992 |
1993 |
1994 |
1995 |
1996 |
1997 |
1998 |
1999 |
2000 |
2001 |
2002 |
2003 |
2004 |
2005 |
2006 |
2007 |
2008 |
2009 |
2010 |
2011 |
2012 |
2013 |
2014 |
2015 |
2016 |
2017 |
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Gambling Expenditures % chg |
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Nominal GDP % chg |
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||||||||||||||||||||||||||||||||||||||
Source: Goldman Sachs Global Investment Research, Bureau of Economic Analysis
Exhibit 60: Las Vegas GGR is approaching 2007 peaks, but growth has moderated in recent years
GGR, $mn |
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Growth, yoy |
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$8,000.0 |
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15.0% |
$7,000.0 |
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10.0% |
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$6,000.0 |
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$5,000.0 |
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5.0% |
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$4,000.0 |
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0.0% |
$3,000.0 |
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-5.0% |
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$2,000.0 |
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$1,000.0 |
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-10.0% |
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$0.0 |
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-15.0% |
2000 |
2001 |
2002 |
2003 |
2004 |
2005 |
2006 |
2007 |
2008 |
2009 |
2010 |
2011 |
2012 |
2013 |
2014 |
2015 |
2016 |
2017 |
Source: Goldman Sachs Global Investment Research, Nevada Gaming Commission
Exhibit 61: Macau Annual GGR and Visitor Trends |
Exhibit 62: VIP GGR has slowed while Mass GGR remains strong |
GGR ($bn) |
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Visitors |
(m |
50% |
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$50.0 |
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$45.3 |
$44.1 |
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32.6 |
35 |
40% |
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30% |
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$45.0 |
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$38.2 |
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30 |
20% |
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$40.0 |
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$33.6 |
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10% |
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$35.0 |
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$33.4 |
25 |
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$29.0 |
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0% |
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$30.0 |
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$28.0 |
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$23.7 |
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$25.0 |
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-20% |
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15 |
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$20.0 |
$15.1 |
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-30% |
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$13.7 |
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-40% |
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$15.0 |
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10 |
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-50% |
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$10.0 |
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5 |
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$5.0 |
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$0.0 |
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0 |
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2008 |
2009 |
2010 |
2011 |
2012 |
2013 |
2014 |
2015 |
2016 |
2017 |
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VIP GGR growth yoy |
Mass GGR growth yoy |
Source: DICJ, DSEC, Goldman Sachs Global Investment Research |
Source: DICJ, Goldman Sachs Global Investment Research |
4 December 2018 |
28 |
vk.com/id446425943
Goldman Sachs
Best ideas
Credit Outlook
Trade Idea #1: Buy Wynn Macau 2024s (CL) as wider spreads balance with low
leverage. Wynn Macau bonds have been under pressure following concerns of a VIP slowdown and trade tensions between US/China, but we think much of this news is now digested by the market. While Macau VIP gaming is undoubtedly volatile, we think the region remains attractive longer term, evidenced by the continued multi-billion dollar investments planned by operators and solid growth from the mass market. WYNN generates a substantial ~56% of its Macau revenue from the mass market segment. WYNMAC leverage of 2.7x is also lower than other gaming operators (MGM at 5.5x and Caesars’ CEC ex-convert at 6.3x and CGPH at 6.0x).
We continue to view Galaxy Entertainment’s 4.9% stake in Wynn Resorts as a positive local partnership, and at possibly reducing risks around the Macau concession renewal in 2022. WYNMAC bonds contain both CoC provisions as well as a Special Put option if the concession is lost. While we take no opinion on the outcome of the Massachusetts’ investigation into the Encore project, we think resolution could be a catalyst in the name and a positive outcome could improve sentiment across the structure. Overall, we think WYNN has taken considerable steps in improving its positioning following Steve Wynn’s departure, including changing the name of the Boston project, settling multiple legacy lawsuits, and changing its Board composition.
Risks to our view: Downside: unfavorable regulation, Macau concession renewals, market share loss, softening of Macau market, deterioration of macro conditions.
Exhibit 63: WYNNMAC 2024s offer more spread per turn of leverage than peers
|
|
Spread/Leverage |
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160 |
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140 |
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|
120 |
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|
(bps) |
100 |
WYNNLV |
|
80 |
WYNMAC |
||
OAS |
|||
60 |
CGPHLC |
||
|
40 |
MGM |
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||
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20 |
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0 |
Spread/leverage |
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|
Exhibit 64: Wynn Macau VIP vs Mass revenues
$700
$600
$500
$400
$300
$200
$100
$0
1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18
VIP 
Mass
Source: Goldman Sachs Global Investment Research, Bloomberg |
Source: Company data, Goldman Sachs Global Investment Research |
4 December 2018 |
29 |
vk.com/id446425943
Goldman Sachs
Credit Outlook
Trade Idea #2: Swap into Caesars (CGPHLC) 5.25% 25s over Wynn Las Vegas 5.50%
25s. The CGPHLC 25s are just off the 2018 low of $90, currently trading at $91.50. These bonds offer ~30bp of incremental spread and trade three dollar points lower than the comparable WYNNLV bonds. The CRC box, where the CGPHLC bonds reside, is lower levered than Wynn Las Vegas (6.0x vs 6.8x). Caesars is committed to reducing lease-adjusted leverage to 4.5x by 2021 and we think monetization of owned real estate assets could help achieve that goal. In contrast, Wynn management has been more focused shareholder returns demonstrated by recent dividend increases. The CRC entity has some added diversification from properties such as Indiana Grand and Hoosier Park (Centaur deal) and Harrah’s New Orleans, Laughlin, and Atlantic City. A potential combination of the CRC and CEOC boxes could add further diversification as well as capital structure simplification. Caesars’ 3Q performance was below expectations, but the appointment of a new CEO following Mark Frissora’s pending departure could be a catalyst for change at the company. Thus, we are constructive on the bonds for relative value as well as potential strategic optionality.
Risks to our Caesars view: Better/worse Las Vegas RevPAR and market trends, faster/slower deleveraging, larger than expected M&A or shareholder returns.
Exhibit 65: WYNNLV 2024s vs CGPHLC 2025s trading levels
8.00% |
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7.00% |
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6.00% |
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5.00% |
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4.00% |
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3.00% |
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Jan-18 |
Feb-18 |
Mar-18 |
Apr-18 May-18 Jun-18 |
Jul-18 |
Aug-18 |
Sep-18 |
Oct-18 |
Nov-18 |
Dec-18 |
|
|
|
CGPHLC 2025s |
WYNNLV 2025s |
|
|
|
|
|
Source: Goldman Sachs Global Investment Research, Bloomberg
4 December 2018 |
30 |