Gaming/Leisure ‘Most Troubled’ Group for 2021 Debt Defaults, Says Moody’s

Posted on: February 2, 2021, 10:24h. 

Last updated on: February 2, 2021, 01:17h.

Global debt defaults are expected to decline this year. But Moody’s Investors Service sees the potential for trouble in the hotel, gaming and leisure group.

Casino bonds
The Las Vegas Strip, seen here. Moody’s sees gaming issuers as strong relative to other sellers of leisure industry bonds. (Image: New York Times)

The research firm is forecasting a 2.2 percent global default rate for its entire universe of rated high-yield and investment-grade corporate bonds. That’s down from 3.1 percent in 2020, but above the long-term average of 1.7 percent. Based on that 2.2 percent projection, 137 defaults are expected this year, according to Moody’s.

By sector, we expect Business Services and Hotels, Gaming and Leisure to have the most defaults in 2021 followed by Oil & Gas,” said the ratings agency. “Measured by default rates, Hotels, Gaming and Leisure will be the most troubled sector.”

The aforementioned groups are industries showing high levels of vulnerability to coronavirus disruption. By count in 2020, oil and gas was, by far, the worst sector in terms of default rate at 24.6 percent, according to Moody’s. At 12.8 percent and 11.4 percent, respectively, business services and retail were also far worse than the 5.7 percent clip notched by hoteliers, gaming entities and leisure firms.

Not All Bad News for Gaming Issues

The combined hotel, gaming and leisure space is an expansive industry, and while it’s fair to say operators in the space are experiencing weakness at the hands of COVID-19, no two debt issuers are exactly alike.

For credit and equity investors considering gaming fare, that’s meaningful for multiple reasons. First, over the course of the pandemic, casino operators have easily been able to raise cash, either by equity sales or new bond issues. Second, some market observers are bullish on debt offered by gaming operators.

Finally, Moody’s previously said that within the broader leisure landscape, casino and restaurant operators are likely to rebound more rapidly this year than hotel chains and cruise lines.

“In terms of gaming and restaurants, they have probably weathered the worst of the pandemic,” said the ratings agency. “Nevertheless, they still face risks, such as possible additional closures and more restrictive capacity constraints.”

Not Naming Names

In the most recent report, Moody’s doesn’t identify specific gaming names that could be problem children for bondholders this year. However, the ratings agency, in previous research, warned about rising debt levels at Melco Resorts & Entertainment (NASDAQ:MLCO).

Among US-based casino operators, Caesars Entertainment (NASDAQ:CZR) is one of the most indebted, with $16.2 billion in obligations as of Sept. 30, 2020. That company wasn’t specifically mentioned by Moody’s, and it has been able to access capital markets and raise cash via asset sales when needed.

The research firm tracks default data for the leisure industry going back to 1979. From that year through 2020, the group’s default rate reached double-digit percentages just four times — in 2008 and 2009 during the global financial crisis, and in 1989 and 1990, another recessionary period.