Casinos shaky, but likely to survive

"I think equity will change hands," Lerner said at the Reuters Travel and Leisure Summit in New York. "The composition of the industry will be different."

Casino stocks have been punished over the past year as gambling demand has fizzled, tight credit markets have jeopardized growth plans and the Chinese government has acted to slow down the booming Macau market.

Many casino operators piled on debt when borrowing was cheap and are now struggling to avoid default. Companies like Las Vegas Sands and MGM Mirage, which said on Tuesday it is still assessing its financial position and liquidity needs, have come close to violating debt covenants.

To raise cash, MGM in December agreed to sell its Treasure Island casino hotel to investor Phil Ruffin for us$ 775 million. "I wouldn’t be surprised to see more from MGM," Lerner said. "I don’t think any property is out of the question."

MGM owns 10 Las Vegas Strip casino-hotels, including Bellagio, Mandalay Bay and MGM Grand, as well as casino resorts in Detroit, Biloxi, Mississippi and elsewhere. "They’ve got an arsenal of weapons that they can launch to address liquidity and to some extent leverage," Lerner said.

The analyst said MGM will likely look to monetize part of its multi-tower CityCenter project on the Las Vegas Strip, which is slated to open in December. "They could sell a hotel tower or a residential hotel tower to a hotelier," he said. Lerner said MGM has enough liquidity to resolve 2009 through 2010 debt maturities, but "needs to quell concerns that they are going out of business." Las Vegas Sands too has options to avoid violating debt covenants, he said.

Sands Chairman and CEO Sheldon Adelson said on Tuesday that the casino operator expects to avoid a debt default through a combination of cost cuts, the sale of two retail malls and increased business in Macau.

Lerner said other options could include the sale of other Macau assets or renegotiation with banks of debt terms. “Covenant relief is not that big of a deal," he said. "You pay for it, but it happens in other industries all the time."

Despite the current downturn, about 14,000 new hotel rooms will open in Las Vegas between now and 2011, including projects like CityCenter, Fontainebleau Las Vegas and a new tower at the Hard Rock, Lerner estimated. "I think companies will be extremely conservative with balance sheets," he said. "The focus will be less about expansion, more about consolidation."