Fitch: EMEA Gaming Pressured, Other Regions Stable but Challenged

NEW YORK--(BUSINESS WIRE)-- The expectation of intense competition, changing consumer habits, a structural shift to online gaming and increasing regulation and taxes eroding operating margins in the EMEA gaming sector have led Fitch Ratings to revise both the rating and sector outlooks to Negative. Other regions have Stable outlooks, but challenges remain.

For EMEA gaming, financial flexibility and weakened leverage means downside pressure will remain. However, we expect the demand for online gaming to continue growing, with the opportunity for consolidation and geographic diversification to remain. Consolidation within the sector should leave the remaining players better placed to cope with increasing regulation and capex requirements. As online gaming evolves internationally, Fitch expects geographic diversification to continue.

The U.S. gaming outlook is Stable, but REIT transactions and secular changes pose concerns. We believe that convenience-oriented gaming in the U.S. is in a secular decline. Younger people are not as interested in casino-based gaming as baby boomers. The emerging entertainment options and convenience gambling alternatives (e.g. instant lottery tickets, social casino games, online gaming) are taking a greater share of consumers' attention and cash. We think these headwinds will effect slots-oriented regional operators and slot suppliers more than amenity-rich, resort-style casinos. In addition, we note that REIT leases have weakened casino operators as they are not well-suited to be long-term triple net lease tenants given the cyclical and capital-intensive nature of gaming.

For Macau, we project another year of negative revenue growth but expect the declines to moderate with the support from the stabilization in the mass market. The new resorts scheduled to open through 2017 will also provide support but risk cannibalizing the existing operations. The outlook is Stable but we could become more negative on the sector if the Macau and mainland Chinese governments implement policies that are adverse to Macau's gaming industry. Such policies may include tightened visa policies, a crackdown on cash transfer mechanisms (e.g. UnionPay), and a full smoking ban. Closer to break-even or negative incremental cash flows generated by the new resorts would also cause us to reassess our outlook for Macau gaming.

Fitch has assigned Stable outlooks for gaming issuers and the industry in the highly regulated Singapore and Malaysia markets. Credit profiles have been resilient to macroeconomic challenges and fewer tourist arrivals. The Malaysia-based Genting Berhad, Singapore-based Genting Singapore PLC, and Marina Bay Sands Pte Ltd, which own the three integrated resorts (IRs), are established companies that consistently generate robust operating cash flows. They also maintain moderate leverage amid slowing growth and weakening local currencies against the U.S. dollar, fewer tourist arrivals in Malaysia and rising competition from IRs at the Philippines and South Korea.

Finally, Australian casinos are in expansion mode, even amid macroeconomic uncertainty. Australia's two largest listed casinos, Crown Resorts Limited and The Star Entertainment Group will both build new projects using debt despite a weaker broadening economy. Australia's seasonally adjusted GDP growth slowed to 0.2% in 2Q15 (1Q15: 0.3%, 1Q14: 0.4%) amid reduced mining and construction activity and lower exports.

For more information on gaming in each region, please see our series of 2016 Outlooks which are available on our website at www.fitchratings.com.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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Source: Fitch Ratings

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