Making the News

Philadelphia Inquirer

Originally Published:Sunday, March 23, 2008

"This is an issue impacting gaming and other developments around the country," said Joe Weinert, senior vice president of Spectrum Gaming Group L.L.C. in Linwood, N.J. "Every gaming company considering a large-scale development at this time has to take into account the availability of affordable capital."

Cost of capital curtails A.C. casino plans
Tighter lending makes many builders rethink projects that have become too expensive.

By Suzette Parmley
Philadelphia Inquirer

ATLANTIC CITY - Even before the recent demise of Wall Street investment firm Bear Stearns & Co. Inc., casino operators were beginning to wonder about financing for their dream developments in this gambling town.

To some, the cost of entering the nation's second-largest gambling market was no longer within reach - something unexpected two years ago when three operators announced they were buying land here.

"Now is one of the worst times to raise capital because lenders are willing to lend less, and the cost of capital is significantly more expensive than it was a year ago," said gambling analyst Andrew Zarnett of Deutsche Bank AG in New York. "For Atlantic City, it means delays."

Last month, Dan Lee, chief executive officer of Pinnacle Entertainment Inc. of Las Vegas, announced that it was holding off on building a $1.5 billion gambling palace - the one being teased by five billboards along the Atlantic City Expressway.

"I've been asked, 'How the hell are you going to build in Atlantic City?' " Lee said in a year-end earnings conference call on Feb. 26. "The answer is, if credit markets don't improve, we won't build. We're not going to go broke building in Atlantic City."

A Pinnacle spokeswoman said last week that the company's position had not changed.

Suitors for the three Trump casinos on the block for more than a year - Trump Taj Mahal, Trump Marina and Trump Plaza - have dwindled.

"It's very hard to finance jobs," acknowledged Donald J. Trump, chairman of Trump Entertainment Resorts Inc., which owns the Trump casinos. "If you couldn't get financing in the past prior to the credit crunch, it's almost impossible to get it now," he said, "whether you're building or buying casinos."

And there's Bader Field, the undeveloped parcel a half mile from the Boardwalk that has been the subject of a tug-of-war between the city and state. Atlantic City government officials and the Casino Reinvestment Development Authority had wanted to put the coveted land up for bid as early as next month, and hoped to fetch at least $1 billion.

CRDA executive director Tom Carver declined to comment on the impact of the current credit climate on the bidding process. But some operators who envision building mega-casinos on Bader Field are beginning to express doubts that that kind of money would be available.

"Obviously, the credit markets would impact any . . . decision on whether or not they would participate," said Rob Stillwell, spokesman for Boyd Gaming Corp. of Las Vegas, co-owner of the Borgata here.

Signs of trouble may abound for casinos in the bond market, where higher yields usually reflect higher interest rates and risks. The average yield on a recent Standard & Poor's sampling of high-yield corporate bonds is 13.2 percent versus 7.82 percent a year ago. On the Merrill High Yield Master II Index, the yield is 11.12 percent, up from 7.44 percent a year ago.

For this seaside resort that's trying to survive amid growing competition from Connecticut, Delaware, and more recently, Pennsylvania and New York, the credit crunch couldn't come at a worse time.

The year-old slots competition from Pennsylvania has significantly cut into Atlantic City's main revenue from slot machines. Total gambling revenue - both from slots and table games - is down 4.4 percent year-to-date from a year ago.

Atlantic City was relying on building up its other non-gambling attractions and adding super casinos, like the Pinnacle and Revel projects, as a cushion against the slots onslaught.

"This is an issue impacting gaming and other developments around the country," said Joe Weinert, senior vice president of Spectrum Gaming Group L.L.C. in Linwood, N.J. "Every gaming company considering a large-scale development at this time has to take into account the availability of affordable capital."

William J. Downey III, a gaming attorney at Fox Rothschild L.L.P. in Atlantic City, who represents both lenders and potential borrowers, said the credit markets reflect the supply-demand curve.

"When the demand is high and supply is low . . . cost goes up," he said. "A lot of these folks are saying, 'I can't afford to pay what I have to pay to get the loan.' The question now is at what cost?"

Monday was the deadline to bid on the Tropicana. The Boardwalk casino has been up for sale since its former owner, Columbia-Sussex Corp., was stripped of its casino license in December.

New York developer Joseph Palladino was among the bidders, submitting a $950 million formal offer for the casino Monday.

"What I may have been able to pay 7.5 percent interest for, I may have to pay 9 percent or 9.5 percent now," Palladino said of the needed loans. "Anytime you see large amounts like this, I would imagine the interest rates go up."

Others passed on bidding on the Tropicana altogether.

"It's a function of the capital markets, and what we thought we would have to spend," said Jeffrey Hartmann, chief operating officer for Mohegan Tribal Gaming Authority.

He said expanding competition in Pennsylvania with the two Philadelphia waterfront casinos also factored into his firm's change of heart, despite wanting a presence in Atlantic City for years. The company owns and operates the Mohegan Sun Casino in Uncasville, Conn., and Mohegan Sun at Pocono Downs, a slots parlor near Wilkes-Barre.

Pinnacle, which also had its sights on Atlantic City for some time, lost out on a bidding war for the parent company of the Tropicana here and the one in Las Vegas in May 2006 to Columbia-Sussex Corp. It finally bought the former Sands Hotel Casino in September 2006, and demolished it last October to make way for its mega-casino - a project indefinitely on hold.

But pushing through the slowdown, Revel Entertainment Group L.L.C. began laying the foundation in January for its mega-casino resort with a $160 million interim loan.

The loan, which came from two private investment firms, was a fraction of the casino's $2.5 billion price tag, "but takes us to the next level, going vertical with steel in the spring," said Revel chief executive officer Kevin DeSanctis.

Revel is currently trying to secure another short-term loan to get through the next 12 months until credit loosens up - which DeSanctis said he doesn't expect until at least the first quarter of 2009.

"We're just fighting through it," he said. Revel's casino is slated to open in summer 2010.


Contact staff writer Suzette Parmley at 215-854-2594 or .
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