Question of the Day - 26 August 2024

Even when it’s a small renovation, casino companies are loath to tap cash on hand. In many cases, it’s because there’s not a lot of it and they tend to use it for things like stock repurchases. Also, cash on hand can act as a rainy-day fund. In any event, construction is predominantly financed by other means.

In some rare examples, the casino in question is lent money by a corporate parent. That's the case with the Venetian, which is receiving a $1.2 billion cash infusion from owner Apollo Management to cover a massive refit of the property, now 25 years old. That’s an extraordinary circumstance.

In other instances, companies are generating so much cash flow that they roll it right back into what they call "capex" (capital expenditures) and what we’d call "home improvement." That is, as the cash is generated by the casino, much of it is spent to upgrade the property. That’s a healthy business model, especially when one considers the rapid degeneration casinos can suffer from heavy customer use.

Many casino companies draw on their revolving lines of credit (as opposed to generating new debt) to underwrite renovations. A certain amount of borrowing is considered healthy in business, especially in order to demonstrate creditworthiness as it's repaid. Penn Entertainment is currently engaged in a large-scale capex program that includes a new hotel tower for M Resort, financed via revolving loans. Wall Street likes this; it maintains the viability of the assets in a way that also helps get the money repaid.

One last category of company has neither cash on hand nor much borrowing capability, such as Bally’s Corp. How organizations like these intend to finance building projects is one of the great mysteries of gaming. In the case of Bally’s, it has neither the cash nor the prospect of getting any to redo the Tropicana. They say they will, but their vows beg our mother’s favorite question, “Using what for money?” We call such companies "insolvent."