Gaming Corporate Bonds Crimped by Rise of Prediction Markets

Amid perceived rising competitive pressures from prediction markets, credit investors are demanding more compensation to own corporate debt issued by casino and sportsbook operators.

Over the past 30 months, spreads on junk-rated gaming industry debt surged 250 basis points, according to Bloomberg data. That spike occurred as credit spreads across most other industries narrowed. It also accrued against the backdrop of soaring volume on yes/no exchanges. A recent report by Macquarie indicates that with the help of the World Cup, notional volume across prediction markets jumped to $33 billion last month.

Credit spreads measure the difference in yields between high-yield bonds (many casino operators are junk-rated) and safer, lower-yielding debt, such as investment-grade corporates or U.S. Treasuries.

The spike in gaming credit spreads is potentially more concerning when factoring in the point that similar increases aren’t seen across comparable segments, such as hotels, leisure and restaurants, reports Bloomberg.

Bond Markets Responded to Prediction Markets

The rise in casino junk bond spreads isn’t surprising. Citing Neuberger Berman research, Casino.org  last December reported that there could be potential credit market impact as prediction markets swell in popularity.

The asset manager highlighted junk-rated lottery operators as potentially vulnerable to the rise of all-or-nothing exchanges, adding that credit investors considering debt issued by sportsbook operators should employ “greater investment vigilance and discretion” due to the increased spending announced by some of those companies as they attempt to carve out their own prediction market positions.

iGaming and online sportsbook operators notched increased revenue over the first several months of this year, indicating some resilience in the face of increased competition. Additionally, DraftKings (NASDAQ: DKNG) and Flutter Entertainment’s (NYSE: FLUT) FanDuel, among other sportsbook operators, are flexing prediction market muscles of their own.

Some well-known investors are bullish on that pair of sports wagering equities, noting it’s a matter of time before purveyors of sports event contracts are pinched by legal and regulatory issues.

Don’t Blame It All on Prediction Markets

The rise in casino credit spreads can’t be entirely pinned on prediction markets. Some of that spike is attributable to industry consolidation that could lead to more liabilities for already heavily burdened companies.

As Bloomberg reports, Tilman Fertitta’s purposed $17.6 billion takeover of Caesars Entertainment (NASDAQ: CZR) would add another $5 billion in debt to a gaming company already contending with nearly $12 billion in obligations, pushing its leverage to 7.5x.

Likewise, Barry Diller’s proposed acquisition of MGM Resorts International (NYSE: MGM) requires some financing, meaning that if it’s approved, the casino giant’s debt tally, which stood at $6.43 billion at the end of the first quarter, would materially expand.