Fitch Ratings: AC Weakness, Poor Online Revenues Fuel Supply Rationalization

On Jul 16, 2014

Fitch Ratings: “Continued headwinds weakening the gaming industry in Atlantic City, plus poor online gaming revenues, are contributing to a rationalization of supply in the market, according to Fitch Ratings. The supply rationalization is healthy for the market, but additional risk remains if New Jersey passes legislation over the next few years permitting land-based gaming in the state outside of Atlantic City.

“The Trump Plaza Hotel could be the third or fourth casino in Atlantic City to close this year, according to press reports. Revel Casino Hotel will reportedly be auctioned off on August 6; its operating status will be determined by the emergence of potential buyers. Revel filed for bankruptcy for a second time on June 19. The Caesars-owned Showboat will shut its doors on August 31 while the Atlantic Club casino shut down earlier this year.

“Several of these closures were likely delayed by the prospects of online gambling. The market retained capacity for the last two-four years in anticipation of online gaming’s success, especially since online gaming licenses were attached to casino licenses. However, with online gaming revenues plateauing early in the ramp-up cycle, online prospects are now depressed and unprofitable land-based operations are discovering that closing is their best option.

“In Atlantic City, Resorts and Golden Nugget are unprofitable but remain open. Resorts may have another shot at a partnership with PokerStars after the giant online poker operator is acquired by Amaya. Golden Nugget is owned by a large restaurant company (Landry’s) and has an online partnership with Bally.

“The New Jersey gaming regulator reported a third consecutive sequential decline in online gaming revenues with $9.5 million in gross gaming revenue for the month of June, a 9% decrease from May’s $10.5 million. Including June, that totals $63 million year-to-date. Fitch estimates New Jersey’s online gaming revenues will end 2014 in the $120-$130 million range. This is down from our initial forecast of $200-$300 million, which was among the more bearish in the industry when we launched the forecast in Dec. 2013.

“Several factors we had expected to drive sequential growth have not materialized, including a ramp-up in players’ awareness of online gaming as a result of operators’ marketing efforts. The number of online gaming accounts increasing 8% in June to 378,564 from 351,136 in May, and tripling since December, has not translated into increased revenue. Other factors expected to drive growth include technology improvements, users’ adaption to the available payment methods and the rollout of mobile products.

“We still believe that momentum in larger markets like California for online poker will pick up over the next 1-2 years. A number of other states may consider online gaming this year, including Pennsylvania, but despite increased rollout by states including New Jersey, Delaware and Nevada, profits have been disappointing.”