The ongoing and future effects of the COVID-19 outbreak are as far-reaching as they are unknown. Quarantines and statewide “stay at home” orders are keeping consumers, gamers, diners, and travelers out of the market and behind closed doors. 

The long-term consequences that humanity and the markets will face in the aftermath of this disaster are yet to be fully understood or realized. 

The financial impact of the pandemic

We have, however, started to see some preliminary effects in the US economy, starting with massive shifts in the financial sector. From stock market uncertainty, falling commodity prices, and widespread corporate credit downgrades, the future of the US and global markets is a big, fat question mark.

The impact will be long lasting

Even as early as mid-March, the American credit-rating agency Standard & Poor’s (S&P) released a press release stating “The recession is already here.” It said it expects the US GDP to fall by 1% in the first quarter, and by 6% in the second quarter. That would likely mean a recession, which generally takes place when the economy decreases in consecutive quarters.

Companies are drawing heavily on their nearly maxed credit lines, others are feeling the lack of cash on hand, having already been operationally extended. All are now scrambling to figure out how to cut costs to deal with the immense withdrawal of consumers in the current marketplace.

Gaming & resorts take a hit

Amidst the coronavirus pandemic, new fears are being raised about the stability of the gaming industry in the United States. According to new research from S&P, operators of Las Vegas domestic gaming giants are now facing serious credit downgrades in the financial sector.

Prior to the outbreak, the major gaming companies in the US were considered “stable” by the credit agencies With people staying at home under orders from the state, these institutions have no tourist dollars, no gamblers, and no backup plan. 

Credit-rating agencies like Standard & Poor’s and Moody’s have not been shy about communicating their predictions about the toll this outbreak will take on companies in general and integrated resort firms in particular.

MGM and Las Vegas Sands

The two biggest hit so far have been MGM Resorts International (NYSE:LVS) and Las Vegas Sands (NYSE:LVS) casino and resorts who, along with smaller, regional casino companies, received an S&P ratings outlook of “CreditWatch Negative”.

The other major player in corporate credit, Moody’s Investors Service, has placed the ratings of MGM Resorts International on review for downgrade (for now), including its corporate family rating and the rating on the probability of default.

Regional casinos

The credit agencies are somewhat more optimistic about a lower dip and faster recovery for regional gaming companies over their juggernaut counterparts. S&P did, however, place Boyd Gaming (NYSE:BYD), Penn National Gaming (NASDAQ:PENN), and Twin River Worldwide Holdings (NYSE:TRWH), among others, on “CreditWatch Negative.”

“We believe regional gaming markets are more likely to recover faster than destination markets like Las Vegas because most customers are able to drive to those properties instead of fly, which reduces the costs of these trips,” said S&P.

But now the bottom line is that many of these firms are in danger of being lowered to non-investment grade status.

No revenue, while costs persist

A perfect storm of corporate financial disaster is the confluence of a dried-up revenue stream, zero cash-flow, steady and ever-present operational costs, and now an end to credit lines that might have kept companies afloat a bit longer.

S&P explained in its analysis that the 3 major costs faced by casinos are: labor, gaming taxes, and marketing. Despite the savings on gaming taxes and marketing expenses that these firms have taken advantage of, the operational costs of rent and labor still need to be paid. Even over time, the savings won’t offset the costs.

The ratings agencies cited the 30-day governer-mandated suspension in Nevada and the 15-day closure in Macau in February as evidence of anticipated financial instability. With no cash-flow and stable costs, even companies with significant liquidity to cushion their balance sheets in such times face lower ratings on CreditWatch over a short period of time.

Moody’s and S&P have predicted that even with a limited closure period and a possible return to business in the near future, the contracting economy may significantly change consumer behavior in the days, weeks, and months to come. 

In other words, it may be a return to business, but it won’t be a return to business as usual.

The bottom line

Between a Dow Jones loss of 3,000 points in mid-March, plunging oil prices, and social distancing severely impacting consumer spending, there will clearly be significant and lasting repercussions on how we conduct business in the future.

In dire situations like these, it seems that someone always benefits and perhaps that “someone” is online businesses. In a world where gamers/players can’t leave their homes, online casinos, for example, might seem to be the big winner here.

Possibly one of the necessary consequences moving forward will be a shift to the virtual world for how we educate ourselves and our children, how we do business, and maybe even how we have fun.

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