Smoking-Ban Buzzkill Chokes Chile’s Casino Bondholders

Eduardo Passalacqua, a 63-year-old retired salesman, says Chile’s smoking ban in casinos has proven such a buzzkill that he’s not gambling as much as he used to.

“When a machine is on a roll, it’s nice to light up a cigarette and follow through,” he said in an interview at Enjoy SA (ENJOY)’s Rinconada Casino, 64 kilometers (40 miles) north of Santiago. “It loses its charm if you have to leave.”

Passalacqua isn’t alone. In a country where more than 40 percent of adults smoke, the highest rate in the Americas, the ban put in place in March 2013 has throttled attendance at the nation’s casinos, sparking a 31 percent plunge in pretax income in the past year. Enjoy, Chile’s biggest casino operator by revenue, saw visits plunge 24 percent in February from the previous year, deepening a record selloff in the company’s bonds that has left investors with losses.

“The tobacco ban hit them hard,” Carlos Garcia, an analyst at Santiago-based credit rating company Clasificadora de Riesgo Humphreys Ltda., said in a telephone interview. “It may take Enjoy several years to recover from that blow.”

Enjoy Chief Financial Officer Ignacio de la Cuadra said the impact of the smoking ban was worse than it had seen in countries with similar prohibitions such as Argentina and Uruguay.

Photographer: Martin Bernetti/AFP via Getty Images

A man smokes during a concert hours before the start of the enforcement of a newly passed anti-tobacco law, in Vina del Mar, Chile, on Feb. 28, 2013. Close

A man smokes during a concert hours before the start of the enforcement of a newly... Read More

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Photographer: Martin Bernetti/AFP via Getty Images

A man smokes during a concert hours before the start of the enforcement of a newly passed anti-tobacco law, in Vina del Mar, Chile, on Feb. 28, 2013.

‘More Sociable’

“In Chile, the rate of smokers in the population is higher,” he said in a telephone interview from Santiago. “That could be one explanation. The other thing is that habits are different. Chileans go outside to smoke and are more sociable. They have a cigarette and take a drink with them and they’re there for 40 minutes.”

Yields on the Santiago-based company’s 16 billion pesos ($26 million) of notes due 2015 have soared 7.64 percentage points since last May to 14.64 percent, according to the Santiago Exchange. That’s a premium of 10.7 percentage points over similar-maturity Chilean government debt.

The bonds have lost 1.6 percent in the last 12 months compared to a return of 7.6 percent in the Bloomberg Chile Local Sovereign Index.

Chile’s peso fell 0.1 percent today to 561.63 per dollar.

Bond investors are concerned that Enjoy, which has 71 billion pesos of debt payments due this year, will fail to meet covenants that require it to keep its ratio of net debt to earnings before interest, taxes, depreciation and amortization below 5.5 times. The company, which said April 24 that the ratio was 5.41 at the end of the first quarter, persuaded bondholders in 2012 and 2013 to give it more time to bring its debt down below the agreed limits after breaching the covenant.

Covenant Breach

“They’re close to their covenant limits,” Rodolfo Friz, the head of fixed income and currency at Santiago-based Econsult Administradora de Fondos de Inversion SA, said in a telephone interview. “They’ve changed the covenants a couple of times. It would be a very bad sign for them to have to change them again.”

Enjoy will meet its debt covenants, CFO de la Cuadra said. The company has shares it can sell and is considering divesting minority stakes in the property companies through which it owns its hotels, he said.

Enjoy, which obtained the license to manage its municipal casino of Vina del Mar in 1975, currently operates seven casinos in Chile, one in Argentina and one in Uruguay. At Enjoy’s four wholly owned casinos in Antofagasta, Santiago, Santa Cruz and Castro, customers pumped 49 billion pesos into slot machines in February, down 18 percent from a year earlier.

‘Having Fun’

Enjoy’s Rinconada complex, which sits on a rise on the side of an otherwise near-empty valley of dried-out acacia scrub in the Andean foothills, includes a hotel and two restaurants next door to the casino itself. There are 14 tables for roulette, 44 more for poker, blackjack and baccarat and 1,388 slot machines. The casino’s slot machines took in 20.9 billion pesos in February, down 27 percent from the same period last year.

Arturo Arellano, the 52-year-old owner of a trucking company, said he stopping going to casinos when the smoking ban, aimed at lowering tobacco addiction in Chile, went into effect in all enclosed commercial spaces such as restaurants and casinos.

“When you’re having fun, if you stand up to go outside for a smoke, it kind of kills the moment,” he said. “When the smoking ban happened, I stopped coming.”

Worst Over

Arellano, who said he plays the slots as many as seven times a month, was lured back after Enjoy opened a new smoking section in a roofed structure unattached to the main building earlier this year, part of an effort by the company to counter the effects on the ban at its casinos. It only houses 94 slot machines, compared with the more than 1,000 on the main floor.

“Sometimes you see more people in here than out there,” Arellano said.

Rodolfo Schmauk, an analyst at Fitch Ratings’s unit in Santiago, said Enjoy may have already suffered through the worst effects of the smoking ban.

In unaudited first-quarter figures, Enjoy reported an increase in its Ebitda operation margins in Chile to 26.2 percent from 25.9 percent a year before.

“The initial hardest blow already happened,” Schmauk said in an e-mailed response to questions. “The Chilean operations are also showing some recovery.”

To Econsult’s Friz, the smoking ban will continue to hurt Enjoy.

“I don’t know how you can lose money operating a casino because everyone who walks through the door is going to lose money,” he said. “There’s a bad feeling to the whole industry.”

To contact the reporters on this story: Eduardo Thomson in Santiago at ethomson1@bloomberg.net; Sebastian Boyd in Santiago at sboyd9@bloomberg.net

To contact the editors responsible for this story: Brendan Walsh at bwalsh8@bloomberg.net; Michael Tsang at mtsang1@bloomberg.net Lester Pimentel, Bradley Keoun

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