he board’s actions raise an important question during these troubled economic times: What role do regulators play in the financial decisions of gaming companies, or, for that matter, in management decisions in general? The answer: very little.
That may come as a surprise to Nevadans who think the Gaming Control Board regulates nearly everything that happens in a casino, from the cleanliness of hotel linens to the safety of building sites.
A catch-all section of the Gaming Control Act gives regulators leverage over companies by requiring that they “protect the public health, safety, morals, good order and general welfare of the inhabitants of the State, to foster the stability and success of gaming and to preserve the competitive economy and policies of free competition of the State of Nevada.”
The Control Board has rarely used that rule to chastise a company, preferring instead to take a narrow view of its watchdog role - to maintain the integrity of games and collect gaming taxes.
The board assigns agents to monitor financial filings by public gaming companies and auditors periodically review their compliance with gaming laws. But the board generally lets other agencies, including the Southern Nevada Health District, US Occupational Safety and Health Administration, National Labor Relations Board and US Equal Employment Opportunity Commission, punish rule-breakers.
The Control Board doesn’t get involved if a dealer is fired to cut costs, thin out an older workforce or head off a union organizing campaign. If that dealer cheats a player, however, the board steps in.
Indeed, there’s little regulators can do if companies get in over their heads besides requiring them to maintain a certain amount of cash on hand. Just like a bank’s cash reserves, the casino bankroll is based on the size of the operation and ensures that winning gamblers are paid. So far, Nevada casinos are meeting minimum bankroll requirements.
Regulators do have a big role in licensing new management teams, determining whether applicants have adequate funding from a suitable source.
The latter requirement has been a fairly easy hurdle since the mob was phased out of casino finances decades ago. And, until recently, lenders big and small lined up to risk their money on casino deals, assuring that there would always be someone willing to back any bullish earnings projections from casino developers. That brings us to the cash-poor situation some casino companies find themselves in today.
An unprecedented borrowing and building binge was followed by the biggest consumer recession in the modern casino era, leaving companies scrambling for cash to pay ballooning debts even as their earnings fall by double-digits.
Control Board Chairman Dennis Neilander says the downturn isn’t likely to change how regulators review future deals. The methods for evaluating companies still hold true because they are based upon historical returns as well as current economic estimates, Neilander said. “If people make projections in this economy they better be conservative with those projections,” he said.
Yet regulators rarely second-guess financial projections made by applicants because those projections are typically conservative, or at least reasonable. After all, applicants building properties have risked millions or billions to construct their casinos before license applications are voted on by the Gaming Control Board.
The only notable exception in recent years occurred in 2005, when the board rejected a plan to acquire the Fitzgeralds casino in Reno. The applicants would have run out of cash within months given that earnings would have had to increase significantly just to break even after debt costs.
Even though the primary owner planned to invest his life savings in the casino, the money wouldn’t have been enough to fend off shortfalls, regulators said. Approving that application might have resulted in a shuttered casino, putting hundreds of workers in the street. But it’s rare that regulators find projections that off-base.
The recent leveraged buyouts of Station Casinos and Harrah’s Entertainment, for example, were based on single-digit earnings increases that were in line with what the companies had been generating over the past several years. Regulators compared the deals with similarly sized transactions in other industries and determined they weren’t unreasonably risky.
Neither regulators nor company executives and their lenders had any reason to be suspicious of these projections because the economic decline turned out to be worse than most people in corporate America could have imagined.
Companies and lenders have since realized that the industry isn’t as resistant to recessions as many had assumed. That conclusion, they realized, was based upon a fairly brief history of legalized gambling, absent from today’s competitive pressures. Even if the unexpected had not happened, it would be improper for the Gaming Control Board to reject today’s megadeals, with billions of investor dollars riding on them, say gaming insiders.
In years past, the board has rejected licenses for a handful of companies that hadn’t risked enough of the owners’ money, allowing them to walk away from a business failure. That’s not the case with the major gaming companies. While these companies’ loan balances have skyrocketed into the billions, so has their top executives’ exposure to that risk. “In poker terms, they’re all in,” one former regulator put it.