Cost cutting, layoffs and cancellations only go so far…

Gaming companies have entered a new phase in trying to manage through the economy.

They have gone through cost controls, some very painful as in big employee layoffs. And they have canceled or shelved new casinos and expansions, some after construction was well underway, such as Echelon in Las Vegas and at Mohegan Sun in Connecticut.

Now they are trying to slash their debt burdens and beef up their balance sheets.

Some, like Station Casinos and Harrah’s, have offered to swap out bonds for new ones at much lower values. Station had to cancel its effort when bondholders declined to accept as low as 20 cents to 50 cents on the dollar.

Others, like Las Vegas Sands, raised money by selling stock, though that diluted the value of shares owned by existing shareholders.

MGM Mirage has taken another course, selling assets, most recently what could be considered a core holding, Treasure Island casino in Las Vegas.

The reasons for this bitter medicine varies. Harrah’s and Station need to reduce the burden of debt piled up in their buyouts. LVS and MGM have big construction projects to finance. MGM also has $2.4 billion in debt maturing over the next two years and wants to avoid refinancing it a double-digit interest rates if possible.

But the root causes are all the same—a recession that has hit discretionary spending very hard.

In this environment, companies with low debt have a big advantage.

In a recent report, Joel Simkins of Macquarie Research identified some of them. Regional casino operator Penn National has $1 billion in cash. WMS is close to zero net debt. Bally’s net debt is just one times EBITDA, he noted.

There are other companies with more elevated debt, but with growth catalysts ahead.

Ameristar is one. ASCA will benefit from liberalized gaming laws in Missouri and Colorado. The company also is finishing an upscale hotel and spa in Colorado that will give it the only destination quality casino resort in the state to take advantage of the new laws. After that, ASCA has no more projects, meaning debt can be paid down.

Pinnacle likewise benefits at its existing Missouri casinos, plus it opens a suburban St. Louis casino next year and might get to move its downtown riverboat, the President, to a more profitable location.

And for those who like speculative micro caps, Nevada Gold & Casinos pulled off a deal that leaves it sitting pretty, at least from a cash point of view. The company has sold its Buena Vista, California, Indian casino contract and has received the first $16 million payment. After final payment, UWN will have about $1.30 a share in cash, or nearly twice its recent stock price, Mitch Saks of Grand Slam Asset Management has calculated.

Finally, the industry’s woes present opportunities for those with cash or borrowing power. Penn National, for example, is known to be on the prowl. Boyd Gaming has $2.2 billion in borrowing capacity, enough to be an acquirer, such as the half of Borgata it does not own.

And acquisitions from motivated sellers could fetch some meaningful properties.

As Phil Ruffin pointed out in buying TI, he laid out $775 million for a property that, built from scratch, would cost about $3 billion.

We’re closing out an extraordinarily difficult year in which the groundwork has been laid for a much different landscape come the end of 2009.

By Frank Fantini

Frank Fantini is the editor and publisher of Fantini’s Gaming Report. A free 30-day trial subscription is available by calling toll free: 1-866-683-4357 or online at www.gaminginvestments.com.

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