LAS VEGAS -- In the mid-1980s, before the era of megaresorts, Nevada's gaming industry generated roughly $3 in revenue for every dollar spent on long-term debt.
As the public began craving bigger and newer resort attractions, and gaming companies did whatever they could to meet demand, the construction debt began piling up. Add the most expensive company buyout in gaming history, coupled with the ravages of the Great Recession, and the result today is a gaming balance sheet with more debt than revenue.
The authors of two separate studies on casino finances say massive debt slows the economy because money that could be spent hiring more workers goes instead to pay off loans. As David Schwartz, director of the UNLV Center for Gaming Research, said Thursday, that translates to poorer customer service if it means a hotel could have had five workers at their registration desk instead of four.
"If you've got more money going toward debt and interest payments, that's less money you can spend on other things," he said.
Neither Schwartz or Jeremy Aguero, a principal at Las Vegas economic analysis firm Applied Analysis, say they believe gaming companies have dug a hole so deep they cannot recover. To the contrary, there are signs the industry's recovery is under way.
"We will go over 40 million visitors this year, which will be a record, and I think it will be a real big deal," Aguero said.
Late last month, Schwartz reported that Nevada's long-term gaming debt last fiscal year was nearly $24.5 billion plus $3 billion in interest, versus $22 billion in revenue. Aguero reported in 2010 that Nevada gaming debt exceeded revenue for the first time in fiscal 2008. That's when the industry owed $1.22 for every dollar taken in.
A major contributor to the debt that year was the $17.7 billion buyout of Harrah's Entertainment -- now Caesars Entertainment -- by private equity firms Apollo Management and Texas Pacific Group. Companies also ran up massive construction debt led by the likes of MGM Resorts International, a partner in the $8.5 billion CityCenter project that remains $2.5 billion in debt.
Gaming revenue is once again on the rise, a trend that will continue if Aguero's prediction of record visitation to Las Vegas holds up. As long as revenue continues to increase, Aguero said he believes lenders will extend the maturation dates on gaming loans, which many already have done. Aguero said the industry already has begun paying down principal, with last year's $24.5 billion debt representing a $3.9 billion drop from the peak in 2008.
Station Casinos ended last year with $2.5 billion in debt, a considerable drop from a $5.9 billion debt when the company filed for bankruptcy in 2009.
Credit rating agencies are also beginning to look more favorably at the industry, which can lead to better lending conditions for the companies. Moody's Investors Service announced earlier this month that it would review Caesars Entertainment's debt for a possible upgrade. Fitch Ratings last fall upgraded MGM Resorts debt and Moody's did the same last year for Las Vegas Sands Corp.
Gaming, though, is not completely home-free. The Cosmopolitan announced Tuesday that it is laying off more than 40 workers. And the days of constructing new multi-billion-dollar megaresorts on the Strip are still over for the foreseeable future.
Gaming companies with substantial debt can survive if they become smarter with their money, Schwartz said.
"Casinos have to be a bit more cautious because of their debt," he said.
That means settling for smaller-scale projects and entering more business partnerships to avoid adding to the debt.
He cited an example of both: Caesars Entertainment is pressing forward with The Linq, a $550 million retail development that will include a 550-foot observation wheel; and MGM Resorts announced Wednesday it would partner with Ameristar Casinos to extend offers to each other's players.
"Ten years ago, MGM would have tried to buy Ameristar," Schwartz said.