FREE MEMBERSHIP Includes » ABL Advisor eNews + iData Blasts | JOIN NOW ABLAdvisor Gray ABLAdvisor Blue
Skip Navigation LinksHome / Articles / Read Article


Protecting Your Chips: What Every Lender Should Know Before “Betting on The House”

Date: Jun 11, 2013 @ 07:00 AM
Filed Under: Casino Finance

In the past five years, the North American gaming industry has changed drastically. The “bricks-and-mortar arms race” that paved the way for the development of some of the industry’s flagship properties has ended and the old adage of “if you build it, they will come” rings true only in the bygone days of yesteryear’s casino industry (and perhaps a magical baseball field in Dubuque County, Iowa). In the aftermath of some of the gambling business’ most challenging years, many of us continue to wonder what the future has in store for a casino industry that is evolving more rapidly than ever before.

As state and local governments have relied more and more on casino gaming to address budgetary shortfalls, the level of gaming expansion in recent years has been unprecedented. Even some of the strongest regional markets of the Midwestern and Northeastern United States, once considered insulated from competition and practically recession-proof, now find themselves experiencing double-digit year-over-year declines in casino revenues; and in the midst of all this, potential plans for land-based and internet gaming expansion continue to be evaluated and/or pursued in Commercial and Native American jurisdictions across the United States — including California, Florida, Illinois, Maryland, Massachusetts, New York, Pennsylvania, and Texas, just to name a few.

In the aftermath of the Great Recession, a number of former liability-side capital structure participants now find their interests classified under the equity sections of casino operators’ balance sheets; this is because poor financial performance combined with weak valuation multiples left these creditors with very few, if any, otherwise viable exit strategies. Having worked closely along-side a number of these parties over the past five years, I have seen first-hand some of the perilous situations that lenders to the gaming industry have been forced to deal with. To this end, the remainder of this article sets forth two critically important things that prospective financiers rolling the dice on new casino loans should thoroughly understand before making any new lending decisions: 1.) The unique market in which the subject casino property operates; and 2.) Management’s operating philosophies and business plans for each specific gaming asset. Although these concepts are seemingly rudimentary in nature, I continue to remain astonished at the amount of foreseeable problems that could have been avoided had they been evaluated more scrupulously during initial diligence efforts.

Understanding the Market

Each gaming jurisdiction has its own set of unique gamers, rules and regulatory enforcement agencies. Certain jurisdictions are more heavily penetrated than others, with win-per-unit-per-day figures varying drastically across different gaming markets. Some markets offer only a limited number of casino licenses while others have no restrictions on the number of licenses that can be awarded. Legislation regarding expansion in certain markets is much more difficult to pass than it would be in others. The personal and political agendas of elected officials and politicians vary drastically from one jurisdiction to another. All of these things highlight one of the key issues that capital providers to the casino industry must be aware of — no two markets are the same and general knowledge of the overall industry may no longer be sufficient to properly evaluate prospective lending opportunities.

The good news is that that there are no shortages of research coverage or specialized consultants in today’s gaming industry. Some of the research reports I typically receive from Wall Street analysts can span hundreds of pages long, and provide detailed coverage of events and circumstances impacting a number of different gaming markets. Even consultants’ roles have evolved — there is a specialist out there for everything these days — attorneys, accountants, and casino operations and marketing advisors have all chosen to develop practice areas focused on the unique aspects of niche casino markets around the globe. Gone are the days of the generalist. Perhaps most indicative of the times, turnaround management, a skillset no one ever though the casino industry would need, has even carved a distinctive niche for itself in today’s gaming industry; even the industry’s trade conventions, such as the East Coast Gaming Congress and Southern and Midwest (new this year) Gaming Summits, now focus exclusively on regional, niche markets.

So how can you as a prospective gambling hall creditor make the most effective lending decisions? In addition to attending the trade shows, signing up for Wall Street research reports and familiarizing yourself with the vast amount of publicly available information that is out there on the subject property’s jurisdiction, I have two primary suggestions.

First, visit the subject property and its market competitors! You will be incredibly surprised at what can be learned through a one or two-day long site-visit, even if you aren’t an expert in casino operations and marketing. Sign up for a player’s card and put a ten dollar bill into a slot machine. Was there a line at the player’s club? Was the dealer friendly? Was the casino floor busy or empty? Did a cocktail waitress approach you for a drink? What kind of direct-mail offers did you receive a few weeks after your visit? Ask a fellow gaming patron how he or she feels about the property relative to other competitors. Pay attention to key differences in “bricks & mortar” and understand how the subject property stacks-up against the competition. As someone who began my career as a financial statement auditor, I’ll never forget the advice of my auditing professor whose first words to our class were “don’t ever underestimate the power of observation.”

Next, it is always wise to get a second (and sometimes third) opinion when evaluating the merits of a new lending opportunity. Having seen a number of workout situations in the gaming space, I’ve concluded that market projections and feasibility studies are, by nature, inherently wrong. I have seen far too many capital providers in this industry rely on a single party’s feasibility report to make large capital allocation decisions, only to watch their investments tank a few years later when some previously unthought-of, but foreseeable circumstance materialized. Regardless of how qualified and capable the management team and advisors of the property you are dealing with are, it is always best to have your own independent experts evaluate your situation too. In this regard, I recommend assembling the following team to help evaluate capital allocation decisions: 1.) a qualified gaming law attorney who has specific knowledge of the unique jurisdiction in which the subject property will operate; 2.) a qualified casino operations and marketing consultant who also knows the specific market of the subject property; and 3.) in the case of a greenfield project, a local construction consultant.

A common misconception is that professional help is too expensive—it’s not; there are lots of professionals out there who will not charge you an arm-and-a-leg to provide a guided market tour or share their thoughts on management’s projections or an outside consultant’s feasibility study. These people have seen it all and know what can go wrong and when such an outcome might be likely. It is in your best interest to develop a good team that will help you make the most educated decisions possible. No one has a crystal ball, but sometimes a little extra diligence on the front-end can go a long way in ensuring you too don’t find yourself as the unintended owner of a casino property a few years down the road due to a lending decision gone bad.

Understanding Management’s Operating Philosophy and Business Plan

As I mentioned previously, every gaming jurisdiction is different; philosophies and operating strategies that might work in one market could be destined for failure in another. Some gaming markets serve as tourist destinations and attract people from across the globe who may visit properties once or twice a year, while others attract ultra-high frequency local gamblers. In addition, most gaming markets are constantly changing with operators being forced to react to the threat of new competition in a neighboring jurisdiction (think Pennsylvania and Michigan with the recent introduction of four commercial casinos in Ohio) or exploit recently approved legislation for expanded gaming initiatives (think the recent implementation of table games in Maryland).

Once you are familiar with the subject property itself and the market in which it operates, it is particularly important to ensure you understand management’s operating philosophy and strategic business plans for the asset. Of critical importance is whether that operating philosophy and any related go-forward strategic plans are properly aligned with the subject property and its market’s unique features.

In your on-site observation of the property, pay attention to the property’s branding and whether it seems to appropriately cater to the unique attributes of the market in which it operates. How do the outdoor advertisements and billboards position the property to its target audience? Do the food offerings fit with the market? Patrons in Las Vegas might be willing to pay $15 for a hamburger, but the same may not hold true for Detroit. What type of music-loop is playing on the casino floor? The perpetual blasting of techno music in Atlantic City may not be right for that market’s demographic. What does the gaming floor mix look like? If the property has an older demographic that prefers reel-games with handles to pull, but all of the slot machines look more like video games than one-armed bandits, that could be a problem.

I have seen first-hand a number of disastrous situations in which an executive whose experience is heavily weighted toward high-end destination markets is retained to operate a lower-end property in a high-frequency locals market. These situations have been disastrous because these executives’ strategies, which often require extensive capital expenditures to “enhance” the property and its amenities, fail to generate returns on invested capital (and in some situations actually cause financial performance to worsen because the new branding initiatives upset core customers who are angry that the old hot dog stand has been replaced by a steakhouse!).

Even in the post-2007 gaming economy, I have been particularly surprised at the willingness of the capital markets to supply dollars for new expansion projects that are misaligned with a property’s or markets unique features. While some degree of capital will always be required to maintain a property’s competitive position in the market, there is a fine line between that which is necessary and that which may end up wasted on a misaligned growth or re-branding strategy.

The take away is that management’s operational and marketing strategies should always be consistent with the unique aspects of each subject property and the market in which it operates. Not all capital projects are wasteful, but sometimes they can be used as an excuse to mask underlying deficiencies in operations and marketing that if fixed, would generate far more gaming revenues than the project itself.
In the end, the success of any casino operation depends on two things being executed properly—marketing and operations. Good casino marketing, a complex behavior science in today’s age, will ensure patrons visit the property. From there, it is up to the operations function to ensure that fair-share gaming revenues are generated. Of critical importance, however, is that both the marketing and operational strategies of the subject property are custom tailored to the unique characteristics of the market in which it operates. As I mentioned earlier, the days of a one-size-fits-all strategy are a thing of the past.


The gaming industry has become particularly saturated in recent years and in the absence of a particularly robust economic comeback, whereby consumers’ discretionary incomes grow to new and unprecedented peaks, many of the industry’s existing operators will continue to find themselves in the middle of a fierce competition to retain the market share necessary to stay alive. Those operators who know their markets and embrace their properties’ unique attributes will be the ones who stand the best chances of surviving the next wave of restructurings.

In this regard, I cannot stress enough the importance of ensuring that you, as a prospective creditor, develop unique first-hand knowledge of the subject property and the market in which it operates. Unlike the days of yesteryear, where most investment opportunities in the gaming industry were considered good ones, creditors are now forced to be much more selective.

Alexander A. Calderone
Managing Director | Calderone Advisory Group
Alex A. Calderone CPA/ABV, CGMA, CTP, CFE is the Managing Director of Calderone Advisory Group, LLC, a boutique turnaround consulting and litigation support firm serving the national middle market. Calderone has provided turnaround management, expert witness, and valuation services to numerous gaming operators and their creditor constituencies spanning across North America and beyond. He can be reached at
Comments From Our Members

You must be an ABL Advisor member to post comments. Login or Join Now.