To write about Bally’s again so soon may seem like Bally bashing, but it is not. The issues raised by recent reports about Bally’s are big. In fact, the same issues hang over other major gaming companies with large debt. The public market used to be the way to raise money without debt, but to acquire or build new casinos requires significant capital investment. Large acquisitions or building new resorts requires assuming a large debt. The debt itself is tied directly to the project, but the cost of the money is related to the economy. The interest rate at any given time is dependent on the economy and the Federal Reserve, and as we have seen, getting the feds to lower the interest rate is not an easy proposition. Thus, due to today’s inflation, money is expensive. To add to the cost of money, construction costs have been trending up since COVID. So a company like Bally’s that is trying to finance and build casinos in New York City, Chicago, and Las Vegas has to take on significant debt. Caesars and MGM are also highly leveraged, with a lingering legacy of debt from past expansion.
Debt is constant. It is also unrelenting pressure. Homeowners understand that pressure as much as corporate executives. For a family buying a house, if the cost of living goes up or if the household income goes down for any reason, the pressure becomes more intense. A pandemic, recession, job loss, or divorce make it more difficult to make the mortgage payment. Sometimes it is not possible and the bank forecloses. Every downturn in the economy leads to more foreclosures. In business, it is the same.
In the gaming industry, any change in the economy, such as during a plague, recession, or war, causes revenues to decline; debt payments become more onerous. Just ask Bally’s. It is back in the news again and the news is not good. At close of day on Monday, the stock had fallen dramatically on reports that the company doubted its ability to continue. After the market closed on Friday, Bally’s reported total revenue, but avoided detailing EBITDA and net income. The revenue would not have caused alarm among investors and analysts, but something in the filing did make everyone nervous.
In its filing, Bally’s stated, “While the company is actively engaged in discussions on several financing alternatives, the conditions and events raise substantial doubt about the company’s ability to continue as a going concern.” Bally’s did not make that statement on its own; the statement was the opinion of the outside auditors. Auditors are required to opine on a corporation’s ability to “continue as a going concern.” The language is boilerplate and reveals nothing specific about Bally’s. But for the market, it is chilling.
Truist Securities analyst Barry Jonas said, “It’s not a good look and is rarely seen across our coverage.” Jonas said it would probably make it more difficult for Bally’s to finance its projects. Jonas does see a solution: He thinks investors are very interested in the New York City project and would willingly buy the stock if Bally’s cleaned up its act. Jonas thinks Bally’s will lose the Chicago casino-resort under construction, but can sell the property, license, and opportunity on the Las Vegas Strip. And maybe sell a couple of other underperforming properties in other jurisdictions. Then Bally’s would look like a good buy for investors interested in owning a piece of a casino in the Big Apple. Or Carl Icahn could buy Bally’s, as he seems to have missed out on the second bite of the apple of Caesars. Jonas did not say that, I did.
Bloomberg reported another, but related, issue, a breach of covenant. According to Bloomberg, Bally’s stated that it doesn’t expect to be able to satisfy lender requirements on liquidity or its debt-leverage ratio, according to the filing. That is also boilerplate language, but much more personal. Putting words in Bally’s mouth, the auditors say, in a vague way, we might not make it through the rough waters ahead. However, forecasting a breach of covenant says we are not living up to our end of the bargain on the loan. If that refers to Chicago, it would be significant. When the borrower fails to maintain the conditions specified in the loan agreement, the lender can in some circumstances call the loan or take possession of the property.
That happened recently in Korea. The Mohegan tribe spent five years and $1.6 billion building Inspire Entertainment Resort there. Less than a year after the property opened, Bain Capital took possession of the resort, claiming that Mohegan had failed to meet the terms of the agreement. That could be the fate of Bally’s Chicago.
Both the covenant and going concern issues hang over Bally’s and threaten if not the corporation itself, several of its major projects. But not to worry, Bally’s always has something else in the wings, such as Australia, England, or Louisiana.
