Christie Casino Glut Depresses Borgata Bonds: Corporate Finance

New Jersey Governor Chris Christie is failing to convince credit investors that Atlantic City will be able to sustain another casino as the bonds of its most profitable venue lose out on a record rally for gaming debt.

Borgata Hotel Casino & Spa bonds that were issued in May and traded as high as 105.5 cents on the dollar in July have since lost 4.5 percent while casino bonds gained an average 4.9 percent, Bank of America Merrill Lynch index data show. The $394.4 million of 9.5 percent notes due October 2015 dropped to 94.1 cents on the dollar yesterday to yield 11.6 percent.

The gambling resort, co-owned by Boyd Gaming Corp. and MGM Resorts International, is lagging behind peers as Revel Entertainment Group LLC plans to open the first new casino since Borgata’s July 2003 opening. The new venue, which had a $261 million tax reimbursement approved as Christie seeks to boost the economy by reversing four years of declining casino revenue, will test the seaside town’s capacity to attract a larger pool of visitors as competition intensifies from neighboring states.

“There’s too much capacity in Atlantic City now,” said John Kempf, a credit analyst at Royal Bank of Canada in New York. “Borgata could take a significant hit here.”

Revel, which is built on the north end of Atlantic City’s beachfront boardwalk, is scheduled to open next month. Morgan Stanley initially invested about $1.2 billion into the project before writing down 97.7 percent of its value as the casino industry stagnated. Revel’s construction was suspended in 2009.


Christie said he spoke with Morgan Stanley in January 2011 about reviving the project, saying that Atlantic City’s monopoly on casino “day-trippers” has eroded with competition from Delaware, Pennsylvania and New York, and that the city needs to draw more convention business and summer vacationers.

“Revel would play an important role in bringing new life and activity to that,” Christie said at the time.

The developer said in February 2011 that it raised $1.15 billion to restart construction. A $850 million term loan arranged by JPMorgan Chase & Co. was sold at 98.5 cents on the dollar, paying an interest rate 7.5 percentage points more than the London interbank offered rate, a rate banks say they can borrow in dollars from each other.

Borgata, issuer of the only casino bonds backed solely by Atlantic City gambling proceeds, generated $553.9 million of revenue in the first nine months last year, the most of any casino in the town, according to data submitted to the New Jersey Division of Gaming Enforcement. That’s down 2.8 percent from $569.6 million in the same period of 2010.

Revenue Declines

Revenue from all casinos in the city, which anchors the biggest gaming market in the U.S. behind Las Vegas, fell 8 percent during the same period to $2.58 billion, the data show. Gaming revenue from the Las Vegas strip climbed 5.1 percent in all of 2011 to $6.01 billion, according to data from the city’s convention and visitors authority.

“In Atlantic City, overall the gaming revenues are sliding and they’ve been sliding for a long period of time,” said Keith Foley, an analyst at Moody’s Investors Service in New York. “When Borgata opened, it benefited Borgata and that’s it.”

Revel is opening at a time when Atlantic City is losing ground in its own backyard as nearby Connecticut allowed American Indian-run resorts and as Pennsylvania, New York, Delaware, Maryland and West Virginia permitted and expanded casinos.

New ‘Trumps Old’

Pennsylvania’s gaming venues reported gross gambling revenue of $245.8 million in November, for the first time surpassing Atlantic City’s $245.1 million, state figures show.

“New always trumps old and sometimes the new brings in new customers, but that whole mid-Atlantic area has been pretty well picked over the last couple of years,” Chris Snow, an analyst at New York research firm CreditSights Inc., said in a telephone interview. “You have Pennsylvania casinos, New York has those two properties around New York City and Maryland and Delaware have sort of filled in.”

At the same time, New Jersey’s tourism industry overall rebounded in 2011, with tourist spending increasing 7 percent to $38 billion from the year earlier, according to the most recent figures released March 15 by the New Jersey Conference on Tourism. It reached an all-time high of $39.5 billion in 2007.

Another luxury resort will prompt existing casinos to invest more to improve their offerings, Christie told reporters today in Lebanon, New Jersey. He envisions Atlantic City as a hub of summertime conventions and counts on using the mix of legal gambling and the Atlantic Ocean across the boardwalk from casinos as a lure.

“We have to expand on what traditionally has been Atlantic City’s mission,” he said.

Bonds Fall

Borgata, which has 2,769 rooms with an average daily rate of $134, has an occupancy of 86 percent, according to a Boyd Gaming filing with the U.S. Securities and Exchange Commission on March 7. It employed 6,196 people as of Dec. 31 and has $831.7 million of debt.

Both Revel and Borgata “are competing for the same high-end customer,” said Michael Paladino, an analyst at Fitch Ratings in New York.

Borgata’s $393.5 million of 9.875 percent bonds due in August 2018 have declined 2 cents this month to 93 cents on the dollar as of 1:59 p.m. today in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The average price of casino debt rose 0.2 cent during the period to 99.45 cents on the dollar, according to Bank of America Merrill Lynch’s U.S. high-yield gaming index.

Borgata has been preparing for a more competitive landscape by remodeling hotel rooms and “shoring up” marketing, Keith Smith, chief executive officer of Boyd Gaming said in a Feb. 21 conference call with analysts and investors.

‘Room for Them’

“Borgata’s high-quality amenities will continue to be key drivers of success for our business,” Smith said in an e-mailed statement yesterday. “If others go in the same direction, we believe there is room for them in the market.”

While MGM Resorts owns a 50 percent interest in Borgata, it needs to sell its stake by next March as a result of a New Jersey Division of Gaming Enforcement investigation, according to a Feb. 29 company filing. If it fails to do so, a trustee will sell the property within the following 12 months.

The Las Vegas-based casino operator is currently in discussions with potential buyers for the Borgata investment, which it values at about $250 million, the filing said.

While there is always some overlap between customers in any market, Revel will be looking for “a slightly different customer” than Borgata, one “that can stay for several nights,” said Joseph Jaffoni, a spokesman for the company.

“It’s a different kind of property than anything else that’s there right now,” he said. The venue is “not solely thought of as a place to go and wager.”

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