Casino lenders brace for refi wave after sports betting ruling

By Yun Li

NEW YORK (LPC) - The potential legalisation of sports gambling in the US is worrying casino loan investors as par-plus secondary loan prices could wilt if the prospect of improved earnings triggers a loan refinancing wave.

A US Supreme Court ruling on May 14 paved the way for states to legalise sports gambling, which is expected to turbocharge earnings for gaming companies and casino companies and has triggered an equities rally.

“The legalisation of sports betting will provide a shot in the arm for casino operators and casinos themselves,” said Steven Oh, global head of credit and fixed income at PineBridge Investments.

Loans for gaming companies and casinos have been trading at or above par all year with average bids of 100.12 exceeding all other sectors, according to Thomson Reuters LPC data. This contrasts with average bids of 98.57 on the SMi100, which tracks the 100 most widely held loans.

Hotel and casino operator Golden Nugget’s US$1.045bn (776 million pound) term loan B is trading at 101 after breaking over par in the secondary market on April 11, for example.

An improved earnings outlook for the sector raises the probability that issuers could seek to refinance loans on more favourable terms as profits, and potentially credit ratings, increase.

“If the introduction of sports betting does allow for improved earnings outcomes, then you could see these loans repriced again. One negative aspect of being a loan investor is that prepayability,” Oh said.

Already toppy secondary prices are unlikely to move higher and could even fall as loans are refinanced at par, potentially bringing losses to investors that bought over par.

“The equities got the juice on it, but the term loans are usually backed by property and the property valuations were already so high that the Boyds of the world and the Nuggets of the world are trading at yield to call anyway, so there’s nowhere for them to go,” a loan trader said.

Casino operator Boyd Gaming’s US$1.265bn term loan B, which pays lenders a spread of 250bp over Libor with a 0% floor, has been trading at 100.5-101 since April. Casino operator Eldorado Resorts’ US$1.45bn term loan was quoted at 100.625-101 on Friday, unchanged from Monday’s trading levels.

Increased traffic into casinos should ultimately lead to higher cash flows and an improved credit profile for these businesses, said Seth Meyer, portfolio manager at Janus Henderson Investors.

“It’s a nice wind for them, but it doesn’t change the fundamental profile of their balance sheet that much,” Meyer said. “Ebitda estimates are going to be higher because of this, but not significantly. You could see a situation where the credit profile could warrant a lower interest burden.”

Some credit investors played down the implications of the Supreme Court ruling for the time being, arguing that casinos still need to get the green light for sports betting at the state level, which is unlikely to happen before 2019.

“Companies are unlikely to reprice in the immediate future as a direct result of the decision as they still need to get state approvals,” a buysider said. “However, some companies could see improved financial performance in the future, which could lead to repricings.”

(Reporting by Yun Li; Editing by Tessa Walsh and Michelle Sierra)