New Borgata operation to pressure Atlantic City gaming, says CIBC

By Paul A. Harris and Paul Deckelman

St. Louis, Feb. 7 - The word "borgata" means "village" in Italian. And when Boyd Gaming Corp. and joint-venture partner MGM Mirage open their $750 million Borgata property this summer - with 1,500 rooms and suites, 120,000 square feet of gaming space and a first-class resort - the other villagers that inhabit Atlantic City's gaming sector can expect to see some slowing of their revenue streams, according to Jacques Cornet, head of CIBC World Market Inc.'s high-yield research and a gaming bond analyst.

"For everybody to keep their shares, Borgata has to grow the market by 14%," Cornet told Prospect News on Thursday. "Just given where Atlantic City is trending, we don't think it's going to be 14%" he added. "We think the Borgata is going to represent an impact in the high single-digits - seven- or eight- or nine-percent - on top-line revenues."

Although all of Atlantic City's gaming operators stand to feel the pinch, those with operations most concentrated there - as opposed to their neighbors who possess properties nationwide - will likely feel the most significant impact, Cornet said.

CIBC expects that "Atlantic City-centric credits such as Aztar Corp., Park Place Entertainment Corp., Trump Hotels & Casino Resorts Inc. and, to a lesser extent, Harrah's Entertainment Inc. may see some price volatility leading into the opening" of the Borgata.

Harrah's and Trump actually have properties adjacent to the Borgata site in what is known as the city's Marina District, several miles removed from the rest of Atlantic City's casinos, which are strung out along the city's famous Boardwalk or are within a block or so of that landmark thoroughfare at the most.

While Harrah's also has another casino on the Boardwalk, the Showboat, and Trump has two, the Plaza and the Taj Mahal, Harrah's has the advantage of having most of its gaming properties outside of Atlantic City - in Las Vegas, elsewhere in Nevada and other non-New Jersey venues. Trump, in contrast, has most of its gaming operations in New Jersey, apart from a relatively small riverboat gambling operation in Indiana.

Most of the city's other operators are likewise more diversified than Trump. Park Place, the largest U.S. casino company, has four casinos there, the most of any operator in town - Caesars, Bally's, the Atlantic City Hilton and the smaller Claridge - but the bulk of its gaming operations are in Nevada and elsewhere. While Aztar's Tropicana is that company's largest single casino, it too has other casino operations in Nevada and riverboats in the Midwest. Billionaire financier Carl Icahn, who controls Atlantic City's smallish Sands casino, likewise hedges his bets with ownership of several Las Vegas gaming establishments. Only Resorts Atlantic City - spun off last year from Sun International Ltd. - is not diversified.

Late last December in a filing with the New Jersey Casino Control Commission, Trump announced that it would come to the junk bond primary market with an offering of $470 million - a deal very much like the one that it restructured and ultimately pulled the previous May. Sources tell Prospect News that the Trump deal will likely come - via Credit Suisse First Boston and Deutsche Bank Securities - sometime during the current first quarter.

In a report issued last month on high yield issuers in the gaming sector, CIBC stated that "with the marketing of a new Trump Marina transaction expected early in the year and with relatively limited high-return alternatives in a fundamentally sound business, we believe investors will begin to focus on the valuation of Trump Atlantic City. For more aggressive total return accounts, we maintain our 'outperform' recommendation."

Cornet said that he thinks investors have already priced the Borgata impact into Trump's new deal.

With regard to Atlantic City gaming's absorption of the new Borgata capacity, much depends upon the grace with which its competitors maneuver in its wake, Cornet contended.

"Nobody knows other than the operators how they will respond once Borgata opens," he commented. "Do they get crazy with their promotional efforts or do they wait out the storm? We've seen them do both.

"In the mid-'90s, there was a situation where the promotional activity got crazy, and margins came in dramatically. Then you had Sept. 11, when they saw the revenues drop off initially, and they hung in there and didn't get promotional."

The increased capacity that the Borgata brings to Atlantic City's gaming village arrives against a backdrop of a soft U.S. economy and of gathering geopolitical volatility as the U.S. prepares to go to war with Iraq, Cornet pointed out.

"The numbers tell you that the soft economy is not having a big impact on gaming," he commented. "It's detracting from some of the growth, and it is sluggish in parts. But it's been pretty much contained so far.

"I think the question everyone is trying to figure out is 'What's the impact if we do go to war? Does it become more significant?'"

In its January report on the gaming sector, CIBC noted that for the full year 2002, the CIBC High Yield Gaming Index generated a 13.58% return and for the sixth consecutive year outperformed the CIBC High Yield Composite Index, which posted a 0.17% gain.

Cornet said that very recently - as has been the case with the broader high yield market - the junk bonds of the gaming sector have backed up slightly.

"Over the last week, we've started to see a little bit of a sell-off, so I would say that demand has probably backed off a little," he said.

"Gaming had hung in there so well for so long, [but] it too is now starting to pull back."

The bonds of casino operators with Atlantic City exposure - notably Trump Hotels and Casino Resorts, the least diversified - have been trending lower this week in response to Gov. James McGreevey's plans to hike New Jersey's tax on casino revenues up to 10% from the present 8% in hopes of generating about $90 million more in tax revenues as the Garden State attempts to close a $5 billion budget gap. That plan - and a plan to raise another $45 million by imposing a first-ever 7% tax on "comps" - the complimentary rooms and meals the casinos offer to high rollers to keep them coming back - has drawn the fire of local casino industry operators, who say it will hurt their business and discourage investors in the industry.

Park Place - which had been planning on spending $55 million on improvements at Caesars Atlantic City and was considering investing a further $200 million on its New Jersey operations, said it will hold off on any further investment until it gets a clearer sense of whether the proposed hike in gaming taxes will be approved by legislators. Park Place also reported Thursday that its fourth-quarter net loss was $18 million (6 cents a share), wider than the year-ago deficit of $16 million (5 cents a share). Its 9 3/8% notes due 2007 were being quoted Thursday at 104 bid/105 offered, down from recent peaks above 106.

Trump's Atlantic City Associates' 11¼% first mortgage notes due 2006 were quoted Thursday at 76.25 bid/77.25 offered, up about half a point on the session, but still down notably from recent peak levels around 80-81 bid. Harrah's 7 7/8% notes due 2005, which had hovered above 105 earlier in the week, were seen on Thursday trading around 104.75 bid. Resorts' 11½% notes due 2009 were quoted earlier in the week around 88, while Aztar's 9% notes due 2011 were a shade under 103.

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