Casino saturation and failures

By Dave Anderson:

The Pittsburgh River' Casino looks like it is officially on the path to being a boondooggle. 

And it is not just me making that conclusion.

The Pittsburgh Post-Gazette reports that the Rivers Casino ownership structure is facing a credit downgrade from S&P because the slots parlor is making way less money than anticipated. [h/t Chris Briem]

Standard & Poor's downgraded the credit rating for casino affiliate Holdings Gaming Borrower one notch yesterday, from B to B-minus, citing concerns about the Rivers' "weak operating performance" and its ability to meet debt service payments if there's no change in fortunes....

"It's not as if they're just marginally below [expectations]. They're meaningfully below," said Craig Parmelee, who manages Standard & Poor's gaming and lodging team.

Later on in the article, S&P officials say it is typical to see about a third of all casinos go bankrupt in their original ownership configurations. That is the historical rate under normal conditions. However we are not under normal conditions of consumer non-spending. I think it is likely that the Rivers Casino may go bankrupt sometime during the summer of 2010.

I am not a lawyer, but from my understanding of corporate bankruptcies, everything is under reconsideration in bankruptcy. Seniority of obligations provides some protection for some interested parties, but previous contracts and obligations are moot if the bankruptcy judge decides that is the most viable course forward. This is important because the casino has an annual $7.5 million dollar payment to the Sports and Exhibition Authority for the Penguins arena bonds. I have no idea what the seniority status of the SEA; my bet is that they are fairly low on the totem pole. We may find out the value of the implied moral guarantee contained in the Commonwealth Lease afterall.

The other portion of the article I enjoyed were the reasons why the Rivers Casino is having trouble. An amazing and unanticipated confluence of events such as three casinos within fifty miles, including two with table games were unanticipated competitors, the Steelers suddenly decided to play football in a stadium that is right across the parking lot from the casino, and suburbanite fear of urban areas were all unanticipated factors that have contributed to weaker than expected performance at the Rivers. Whocodaknown.

This should not be surprising. Nate Silver in his Esquire gig looks at gambling and makes the reasonable conclusion that the industry is now a mature industry that is not an automatic profit center with solid and guaranteed annual growth irrespective of the broader circumstances. Almost every major metro area is within a few hours of at least a major slots parlor if not a full-service casino now.

But desperate state governments looking to casinos to bail them out of their budget nightmares are likely to be disappointed. The same may be the case with trying to tap other "sins" for revenue. Nationally, sales of alcohol for off-premises consumption were down significantly last year, an unprecedented 9.3 percent in the fourth quarter, according to the Commerce Department.

Alcohol consumption can at least be expected to bounce back a bit � right? � but a lot of the potential customers of the new casinos may be tapped out. The year 2008 was the first time in history that total casino gaming revenues declined throughout the United States (by about 5 percent according to industry estimates).

Just about everyone who wants to gamble in the United States is already a morning's drive away from being able to do so; with the possible exception of isolated Texas, states that open new casinos will mostly be stealing customers from one another...

Whowouldathunkit.... operating a generic product in an area that is approaching saturation with a target audience that is flat broke and has minimal truly discretionary entertainment income to spend would lead to significantly lower than expected revenue. Absurd I tell you, absurd.....