Relief now, recovery...when?

The American casino industry copes with the X factor that is Covid-19 by David McKee

eeling numbers on a slot machine are a staple of casinos. But in mid-March of this year, it was casino-revenue numbers that were reeling from the Coronavirus pandemic, as state after state shut down its casinos, climaxing with Nevada Gov. Steve Sisolak’s mandatoryclosure order on March 17. “It’s been devastating. All of the casinos in the country are shut down, 652,000 employees are unable to go to work”, said an industry lobbyist. “That’s in addition to upwards of 20,000 Americans who work at gaming supply and manufacturing companies who are impacted by this, 250,000 small-business workers whose companies rely upon gaming for their livelihood. So you’re talking about upwards of a million people whose jobs are immediately impacted and ultimately if casinos are closed until MidMay, it’s a $40 billion or $50 billion loss of activity to the American economy.”

He continued, “People in Las Vegas appreciate this more than most but where people tend to not understand our business much, there’s some sort of legal gaming happening in 43 states and that’s up to 48 if you include lottery. But we are in communities all across this country, supporting local nonprofits, hiring local.”

That same day that Sisolak’s order came down, a story in the Washington Post disclosed that casino companies had huddled with the American Gaming Association and its members had come up with a four-point wish list for Congress. They desired 1) direct cash payments, 2) tax deferments, an idea the AGA had already been promoting, 3) special bankruptcy protections and 4) zero-interest or low-interest loans.

Initially it was feared that, given cheap access to capital, companies that had been laying off employees en masse would use the ready money to buy back stock on the cheap or divert it into executive bonuses. As written, the CARES Act precludes that and some companies have already publicly sworn off stock buybacks. MGM Resorts International was ahead of the curve when then-CEO Jim Murren nixed a scheduled, $1.25 billion share repurchase even before the worst of the crisis hit, a move that got Murren fired, it would R

Casey Clark, Senior Vice President Strategic Communications, American Gaming Association

appear. While some companies have laid off employees by the thousands, others are staying the course.

In the time of Covid-19, Sheldon Adelson has emerged as the conscience of the industry. His Las Vegas Sands vowed not to lay off or furlough any of its approximately 10,000 employees and to extend pay and benefits for a month—a deadline extended by a fortnight when Sisolak added two weeks to his quarantine mandate. In a letter to the New York Post, Adelson wrote, “To my fellow corporate executives who are looking at spreadsheets and trying to determine the impact this crisis will have on sales and share prices, let me say our job as business leaders is now as simple as it is challenging. It is to maximize the number of employees and their families that we can help–and help them for as long as possible.”

By the end of the month, with families of geese promenading up the middle of the Las Vegas Strip and coyotes roaming the streets of San Francisco, Congress passed the CARES Act (Coronavirus Aid, Relief, and Economic Security Act). Gaming got most of what it wanted...but not everything and the devil would be in some of the details. Still, it was a vast improvement on past legislation like the American Recovery & Reinvestment Act of 2009, which had left the casino industry out in the cold.

CARES Package

The key provisions—for casinos and their constituent businesses—of the CARES Act included …

• Access to $454 billion for loans and loan guarantees and other Federal Reserve lending programs, with the interest on loans being tax deductible. (Wynn Resorts had advocated pure handouts but didn’t get its wish.)

• A special loan facility for businesses of 500 to 10,000 employees (which covers all but the biggest casino companies) giving them access to loans on the condition that they retain or rehire 90 percent of their workforce, complete with benefits. The cost of capital is low: 0.5 percent to 4 percent, with some loans being forgivable.

• Losses from 2018 through 2020 become taxdeductible to the extent of as much as 100 percent of tax owed or more, potentially generating tax refunds for businesses.

• Fifty percent of Social Security tax payments can be deferred for 2020, half due next year, half in 2022.

• Interest expense on EBITDA (earnings before interest, taxes, depreciation and amortization, crudely known as cash flow) goes from 30 percent tax deductibility to 50 percent for two years. “That’s a significant expense for many large companies and being able to [increase] that deduction will substantially decrease tax liability,” says economist Jeremy Aguero.

• Capex maintenance becomes immediately taxdeductible, instead of having to be depreciated over 39 years. “For many folks, the tax-code thing’s archaic,” explains Aguero, “and very difficult to parse. But when you’re dealing with it each and every day, like these companies are, those kinds of deductions can mean millions of dollars that are available to sustain wages and salaries or health-care costs. Those will be the difference.”

• $8 billion – out of a desired $18 billion – for tribal governments’ increased expenses. Many, though not all, tribes have lost their main source of income due to casino closures.

no assurance of how much loan money the gaming industry, in all its facets, will get. Many other businesses, especially hotels and airlines, are clamoring for relief. Explicates AGA Senior Vice President Casey Clark, “There’s any number of businesses or industries that will be vying for the access to all the loan provisions and guarantees that are within the CARES Act. There’s hundreds of billions of dollars available but certainly there’s no dedicated funding within that for gaming.” Adds Aguero, “That’s largely dependent on Treasury Secretary Steve Mnuchin, who has a great deal of discretion relevant to the allocation of those funds. In addition to that, funds that will come to the state of Nevada are not in a single pocket. Not all casino companies are larger than 500 employees. Some are fewer than 500 employees, which would allow them to participate in the small-business-loan activities.”

Or will it?

Much to the dismay of the AGA, when it read the fine print it discovered an arcane Small Business Administration rule that precludes modest-sized gaming entities from participating in the Paycheck Protection Act. Also off-limits are Economic Injury Disaster Loans. “In an old SBA regulation, it precluded any entity that derived more than one-third of gross annual revenue from gaming from getting those loans. Our interpretation and our belief is that the congressional intent with the CARES Act superseded that and made all these loans available to all entities,” says Clark, who adds that the AGA and the Congressional Gaming Caucus have been lobbying Mnuchin and the SBA to accept their interpretation.

Aguero divides gaming-dependent small businesses into three categories: 1) small casinos and taverns; 2) suppliers of services like laundry and catering; 3) businesses where casino employees spend their income, anything from medical services to grocery stores. Of the second category he says, “Those companies are also very vulnerable and, arguably, in some ways more vulnerable during this downturn.”

“In SBA’s efforts to quickly issue guidance on the PPP, they relied on antiquated, discriminatory regulations that ignore today’s economic reality and the congressional intent behind the CARES Act, which states that any business concern shall be eligible to receive an SBA loan if they meet specific qualifications regarding their number of employees,” fumed AGA President Bill Miller in a formal statement. “Unless amended, these

initial guidelines will irreparably harm one-third of the U.S. casino industry and the hundreds of thousands of Americans that rely on gaming businesses for their livelihood … the inclusion of gaming businesses in the PPP is critical to help ensure employees can remain connected to their employers, stay off of unemployment, and quickly return to their jobs when this pandemic subsides.”

Even if the SBA relents, will the CARES Act be enough? Nobody seems to think so. “Sufficiency is in the eye of the beholder,” says Aguero, adding that the total package of $2 trillion may be a huge number but “is it likely to solve all of our problems? Number one, it’s not going to solve every problem for every person. I don’t think it was intended to.” Nor does Clark, who says there’s already discussion on Capitol Hill on yet another stimulus package: “Part of that will revolve around what we see happening with the access to capital, how much capital is available. I think everyone expects there will be another relief package,” Clark says, adding that on the upside, “There’s capital that can be accessed that is very cheap, to allow our members to keep supporting their employees as long and strong as they can.”

State of siege

And how long could that be? Companies are taking stock (pun unintended) of how long a Coronavirus crisis they could survive. Cash is king. Las Vegas Sands, could last 14 months, so much does it have socked away. Of course, it only has two U.S. casinos. That helps. The more properties, the higher the ‘burn rate,’ Penn National, with 41 casinos, is running through $6.4 million per day, while MGM Resorts International’s high-end properties are costing it $14.4 million a day.

Between cash and credit, MGM could hang tough for nine months. Penn’s situation was more desperate, having only five months’ capital, a situation exacerbated by the fact that it rents almost all of its casinos from real estate investment trusts (REITs). A measure of Penn’s dire straits was its recent sale of the Tropicana Las Vegas to a REIT in return for five months of free rent—at a $52.5 million loss. That buys Penn two extra months of survival.

Of the CARES Act, Aguero says, “its effectiveness for helping us weather the storm is largely dependent on an unknown factor, which is the storm itself. How long does it take us to get to the other side of the coronavirus crisis? If it happens in relatively short order, yes, it will be helpful for us. If it is longer, it is going to be much more difficult and additional measures may be necessary.” How is the industry weathering aforesaid storm? Manufacturing lines are idle. Casinos are dark. Small businesses that once relied upon casinos to supply a major tranche of business now face an X factor of unknown severity and duration.

A study commissioned by the Nevada Resort Association minced few words: “The immediate impacts sourced to COVID-19 have the potential to eliminate 320,000 jobs earning wages of $1.3 billion per month. Notably, these losses are being temporarily mitigated by companies continuing to pay idle employees, a condition which is unsustainable...Assuming the tourism industry is effectively shuttered for 30 to 90 days, the recovery will require 12 to 18 months and the impacts are devastating for the Nevada economy.” (Aguero estimates it could be twice as bad as the Great Recession of 2008, which saw hobo encampments go up along Las Vegas streets.)

Summarizes Las Vegas think tank Applied Analysis, “The impacts associated with COVID-19 are unparalleled and economically staggering. Should companies’ ability to maintain payroll and health care coverage diminish, hundreds of thousands of employees and billions in wages and salaries will be immediately at risk as will the very core of Nevada’s economy and its fiscal system.” And that’s presuming a three-month shutdown of the resort economy. Further than that, no one dares think.

The AGA, however, maintains a positive mind frame. “People are cooped up in their homes. They want to go out and have fun, but they want to make sure that the health and safety issues are addressed to their satisfaction,” Miller told Global Gaming Business. “It’s easy to shut things down. But,” he cautioned, “opening things back up is much more difficult.” Concludes Clark, “We are economic engines powering these communities but they’re desperate for us to maintain our position and come back stronger than ever. As soon as it’s safe for our employees to do so, we’ll get back to work.”