FANTINI’S FINANCE: Figuring the Fed

A rise in interest rates by the Federal Reserve seems modest, but what will it mean to the gaming industry, from operators to manufacturers?

The Federal Reserve has finally acted, raising interest rates very modestly and going to great pains to say monetary policy remains accommodative and that future rate increases will be gradual and gentle.

However, accommodative and gradual or not, rates are going up, and the Fed projects a Feds Funds rate of 3.4 percent in 2018, up from near zero for the greater part of the past decade.

So what does this mean for gaming stocks and for the gaming industry generally?

The biggest issue for casino companies is consumers having money in their pockets and the willingness to spend it.

If the Fed’s bullish outlook for the U.S. economy proves true, rising rates will be more than offset by flush consumers.

Indeed, many people on fixed incomes would actually benefit as they finally begin earning some interest on their savings, giving them a few more dollars to spend. Casinos stand to benefit disproportionately as fixed-income earners tend to be older, thus more avid casino patrons, and big savers tend to be affluent people more apt to spend on entertainment, especially to destination resorts, such as Las Vegas.

Historically, however, higher rates are considered a dampener for business, and rising rates bound to make it more expensive to borrow for expansion or acquisitions.

Then there is the issue of variable rate debt.

Casino companies have done a good job in recent years of refinancing debt to low rates and of locking in the low interest rates by converting variable interest debt to fixed rate loans and credit lines.

But many companies still have a fair amount of variable rate debt meaning the march to a 3.5 percent Fed Funds rate pushing up commercial rates could raise costs for some companies appreciably.

Having said that, if the Fed keeps to its promise to normalize rates gradually, it provides plenty of time for companies to reduce debt, convert more variable debt to fix rates, and to refinance at what, in many cases, would still be lower rates than they currently pay.

Still, the rising interest rates present another factor that investors must consider in this capital-intensive industry.

Rising interest rates also are factors for gaming technology companies now that several of them have run up debt during the recent round of mergers and acquisitions.

But higher rates have a positive flip side for some suppliers, mostly IGT, at the annuities they use to fund mega jackpot payouts will grow faster.

Perhaps a key to ascertaining the impact of higher interest rates comes in the Fed’s repeated emphasis on this being a normalizing after years of artificially low rates.

In fact, if the Fed Funds rate rises to around 3.5 percent in less than three years, rates will be at a level where, all else being equal, borrowing and investment decisions can be made based on rational business and financial analyses.

And in that environment, stock investors will be able to focus on the fundamental of gaming stocks., which is where most investors want to be.

Articles by Author: Frank Fantini

Frank Fantini is principal at Fantini Advisors, investors and consultants with a focus on gaming.