by Elliott Morss, Morss Global Finance
Politicians in Massachusetts, New York and Rhode Island have put aside moral and/or addiction concerns over gambling. Instead, they recently asked why all the gambling dollars from their citizens go to the casinos (and governments) in Connecticut and New Jersey. They responded by approving for new gaming facilities in all three states. Below, data on these actions is presented with commentary.
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The Current Situation
Table 1 provides gambling revenues and how they have changed since 2007 for northeast US states, with California, Nevada and Macau included as points of reference. The growth in Macau has been truly amazing. And additional facilities continue to be built there. However, as noted in an earlier piece, Japan has just approved a number of new integrated resort casinos. And these can be expected to siphon off some of the gambling from Macau, Singapore, Malaysia and Australia.
Gambling revenues in Nevada, New Jersey, and Connecticut have not recovered from the 2008 global recession caused by the US banking collapse.
Table 1. – Gambling Revenues, Selected States
*Amount Bet Less Amount Paid Out to Players as Winnings
Source: Global Betting & Gaming Consultants (GBGC)
Table 2 gives a summary of existing and new gambling facilities that have just come online or will shortly. Plainridge and an expansion of Twin River only recently started up. MGM in Springfield is scheduled to open next summer with the Wynn casino starting up the following summer. Several New York casinos have recently opened and three more will probably open in the 2020 – 2025 period. Like Foxwoods and Mohegan Sun, MGM and Wynn will build their own hotels. Wynn’s will have 700 rooms with MGM having 250. Note that when all casinos are completed, the gaming machine supply will increase 30%. Data on gaming tables is incomplete but the total will probably also result in a 30% increase.
The final column indicates how far the casinos are from Foxwoods. Note how close the Massachusetts and Rhode Island’s casinos are to Foxwoods and Mohegan Sun. There is evidence that competition from nearby casinos has an impact. I quote from the most recent Foxwoods’ financial report:
“Both Rhode Island casinos have continued with enhanced marketing efforts in 2016 but it was not enough to offset their decline in slot revenues of 3.1% over fiscal year 2015 due to the impact of the opening of Plainridge Park in Massachusetts.”
This demand sensitivity suggests further that both Mohegan and Foxwoods will lose customers to the new MA casinos.
Table 2. – Current and New Casino Facilities
Source: Mashantucket Pequot Gaming Enterprise Annual Report
The following sections will examine the finances of both Foxwoods and Mohegan Sun. The key question is: are they financially sound enough to withstand the new competition?
The Connecticut Casinos Finances – Can They Withstand the Coming Competition?
Even without new competition, Foxwoods is on the brink. Back in 2009, the “Tribe” – the Mashantucket Pequot Gaming Enterprise, the owners of Foxwoods – formally defaulted on its debt. The Tribe’s indebtedness and other obligations remain significant. According to its 2016 Annual Report, its debt totaled $1.8 billion last September. Its report notes further: “On August 14, 2014 the Tribe acknowledged to the lenders under the Credit Facility (the “Credit Facility Lenders”) that it was not in compliance with certain financial covenants in the Loan Agreement as of June 30, 2014 and represented an event of default under the Credit Facility.
In 2014, the Tribe has entered into a “forbearance agreement” with its creditors that has been extended to the end of 2017. The Foxwoods auditors’ note (highlights mine):
“The accompanying statements have been prepared under the assumption that the Enterprise will continue as a going concern which presumes the Enterprise will be able to continue to meet its obligations as they become due without substantial disposition of assets outside the ordinary course of business, restructuring of debt or similar actions. The conditions and events described below and the uncertainty relating to the exercise of default-related remedies available to the Credit Facility Lenders at that time raise substantial doubt about the Enterprise’s ability to continue as a going concern.”
And the early reports for 2017 are not promising. Foxwoods reported declines in revenue for the three-month period ending Dec. 31, the first quarter of its 2017 fiscal year. Gaming revenues were down 4.9% over the same period in 2016. Nongaming revenues were down 6.8%. Net revenues declined 4.2%.
b. Mohegan Sun
Like Foxwoods, the finances of the Mohegan Tribal Gaming Authority (the owners of Mohegan Sun) are precarious. Its debt totals $1.7 billion. Its 2016 annual interest payments of $136 million exceeded its net income of $133 million. $1 billion of its debt comes due next year. And in light of this, the authority has engaged Citizens Bank, Merrill Lynch and a handful of other lenders to arrange $1.4 billion in new senior secured loans. One can imagine that potential new lenders will consider carefully just how dangerous new competitors from Massachusetts and New York will be to Mohegan Sun going forward.
Foxwoods and Mohegan Sun – Their Way of Fighting Back
Foxwoods and Mohegan Sun know they are facing new competition. So what have they done? Together, they have created a new venture – MMCT – to build Connecticut’s third casino. So where have they chosen for the site? East Windsor, just 16 miles away from the MGM casino in Springfield! This sounds crazy! Enough said.
The demand for gambling is finite. And most casinos recognize they can no longer just offer gambling, drinking and smoking. So they now promote themselves as “integrated resort developments” or high-end Disneylands. However, while the non-gambling share of most Las Vegas revenues is equal to or greater than their gambling revenues, this is not true for the Connecticut casinos – both Foxwoods and Mohegan Sun get over 80% of their revenues from gambling.
Warwick Bartlett is the Chief Executive of the Global Betting and Gaming Consultancy (GBGC). GBGC is one of the largest and most credible specialists on gambling in the world. The company has worked with or supplied information from its database to over 500 clients. I have asked Warwick what he sees in the future. His response:
“Mohegan Sun and Foxwoods have 3,700 bedrooms combined whereas Wynn has 700 rooms. Wynn Resorts “product” is the most favored integrated resort for “high rollers” in the world. The likely outcome is that Wynn will take a large percentage of the VIP market, and at the same time expand that market because of the luxurious offer in non-gambling amenities. Mohegan and Foxwoods started out providing a service that did not exist so were able to satisfy pent up demand. They have changed their model since then and their resorts have many attractions. But they are not luxury on the scale of Wynn. My forecast is Fox and Sun will continue to cater to the mass market but may have to offer more to VIP’s and the premium mass market. This will result in lower margins.
Elliott is right, the survival of both is in jeopardy, and the simplistic 80/20 rule implies the VIP’s make 80% of the profit. We have seen as much in Macau, although the US is different, the point is valid, even to a lesser extent. Some consolidation will be required going forward, and it is helpful the management of both are in dialogue. Some intelligent thinking will be required to find another use of their assets.”
The governments of Massachusetts, Rhode Island and New York hope to attract new gambling revenues by approving new casinos. There is a real question as to whether the demand for this many new casinos coupled with the ones already in place can be generated.
Both Connecticut casinos are privately held. Both Wynn (WYNN) and MGM Resorts (MGM) are already so large that whatever happens in Massachusetts will have little impact on their overall financials. Wynn, along with Wynn Macau (1128.HK) already has nearly $10 billion in casino properties while MGM’s properties are closer to $20 billion. On casino investments, the big question is who will win the newly offered casino concessions in Japan.