Atlantic City's hot hand may be cooling

March 2, 2008 1:42:52 PM PST
Unlike gamblers on a hot streak who think the good times will never end, the casinos know better. Yet companies have forged on with plans to spend at least $9 billion on a wave of new casino projects in the country's second-largest gambling destination, even as not-so-subtle signs were surfacing that it might be time to walk away from the table for a while.

Last week's announcement by Pinnacle Entertainment that it may scrap a mega-casino plan worth as much as $2 billion if credit markets don't improve has made the city's casino industry nervous.

"It's a very serious issue right now," said Nick Danna, a senior equity analyst at Sterne Agee & Leach. In the present environment, he added, "Companies simply can't justify embarking on these projects."

Deutsche Bank analyst Andrew Zarnett agreed.

"The credit markets are temporarily closed," he said. "That doesn't mean you can't raise money if you're willing to pay a very high rate of interest. But on anything at a reasonable rate, now wouldn't be the time. That type of deal just isn't getting done right now."

Danna, Zarnett and Pinnacle chairman Dan Lee all expect the credit climate to improve before too long. But the current crunch is raising questions about whether Atlantic City's expansions plans are too much, too fast.

Gov. Jon S. Corzine used to make exactly these types of financing decisions as chairman of Goldman Sachs. Corzine, who helped Lee push the plunger that blew up the old Sands Casino Hotel last October to clear the site for Pinnacle's project, expects things will be fine in the long run.

"Long-term investment decisions are rarely, if ever, made on the basis of short-term capital market conditions," Corzine said in an e-mail to The Associated Press. "We understand that today's markets are not receptive to heavily leveraged projects, such as new casinos, but we expect that appropriately structured and exciting projects, such as the Pinnacle casino, will proceed when conditions improve."

Pinnacle's warning shouldn't have come as that great a surprise.

In late 2006, the first slots parlors opened in the Philadelphia suburbs, and immediately started stealing away some of Atlantic City's most profitable and reliable customers. As a result, 2007 was the first year in the 30-year history of casino gambling in New Jersey that revenues were lower than the year before, falling 5.7 percent; only three of Atlantic City's 11 casinos reported increases for the year.

Last April, a tough new law took effect limiting smoking to no more than 25 percent of the casino floor, further alienating some gamblers.

And last month, the Atlantic City Hilton Casino Resort, which had floated plans for a $1 billion expansion to help it compete with newer, larger casinos, quietly scrapped the plan, citing the declining economy.

"There's no question these are challenging times," said Keith Smith, president of Boyd Gaming, which owns the Borgata Hotel Casino & Spa, Atlantic City's most successful gambling hall.

Joseph Corbo, president of the Casino Association of New Jersey, said the credit crisis is something the casinos can't control. That makes it imperative for city and state officials to keep the things they can control working in favor of a stable environment in Atlantic City, he said.

"If we fail to do this, prospective investors may seek jurisdictions other than New Jersey to invest, both in the near term as well as when the credit markets improve," Corbo said.

Unlike when casinos first opened here in 1978 as the only alternative to Las Vegas, companies now have options including the Gulf Coast, Pennsylvania, along the Mississippi River and in several other states.

The most ambitious plan for Atlantic City is MGM Mirage's $5 billion hotel-casino, which the company insists is still on track for a groundbreaking early next year. Alan Feldman, a senior vice president, said MGM still has plenty of spending room left under its bank loans, no major capital spending commitments over the next few years, and generates significant cash flow from its properties elsewhere.

Revel Entertainment has already begun preliminary construction on a $2 billion Boardwalk casino next to the Showboat Casino Hotel.

Revel is seen by several analysts as being in an interesting situation: more vulnerable to market forces because Atlantic City is the only casino project it has, yet less likely to walk away from it because Revel already has pilings in the ground.

Revel CEO Kevin DeSanctis did not return messages seeking comment.

Zarnett said many of the proposed projects are in the planning stages; the time to line up serious financing will come when they're closer to starting construction in earnest.

"We've had these crises before, and they get resolved," he said. "The weaker projects get winnowed out and the better deals rise to the top and get financed."


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