Anyone following the capital markets leveraged finance and high yield bond charts recently will undoubtedly rush to the nearest medicine cabinet for a strong dose of motion sickness antidote. The opening and closing, constricting and expanding of debt market windows in 2010 has been uncanny. Lenders have pulled back considerably since early 2010 when the markets appeared to have healed in an impressive rebound. Wall Street investors seem to be taking a spectator view of most opportunities, a “wait and see” approach allowing the choppiness to settle. This does not necessarily produce a closed market, but certainly a highly competitive one. For tribal gaming issuers/borrowers, this means stringent lending/investing criteria requirements and increased due diligence scrutiny.
The key buzz word for the current market is “leverage” with “cash” as king. Leverage is measured primarily via two formulas for tribal gaming operations—Net Cash/Overall Debt ratios and Debt Payment/Net Cash Coverage. In the former days of healthy, strong markets, tribes were able to borrow at higher leverage multiples within the first measurement and lower coverage ratios for the latter formula. Now lenders have pulled back considerably, and although still open for business, have tightened the lending criteria to the point of being almost prohibitive for many gaming facilities.
This constrictive phenomenon has caused much teeth gnashing amongst the tribal gaming sector and its ancillary teams of operators, advisors, accountants, bankers and lawyers. Many professional panel discussions, conferences, seminars, white papers and webinars have been organized to address and discuss the tightened credit markets. Much time and expense has been focused on lending practices, increased security provisions, identifying capital, alternative and creative financial solutions. While all these topics are worthy, the most obvious solution should be explored—increased net cash flow. If gaming operations are able to improve the bottom line, their ability to borrow, the amount of funding available, cost of capital and degree of restrictive security provisions all improve for the better. It may seem like a “no-brainer,” yet as the most viable solution to financing challenges, earnings augmentation can be inventive and innovative, and deserves exploration.
Management
Perhaps the single most important factor in improving net revenue is management. With proper proactive, responsive and experienced senior management leadership, an operation can improve dramatically. Depending on the depth of experience of the existing management, it can be helpful to retain outside assessment and/or management consulting. As with any industry, an impartial third party can often point out new ways to augment business, cut costs and increase visits.
Cost Savings Plans
Cost cutting is by far the most painful process in the exercise to increase the bottom line. Many tribal gaming facilities staff more positions than actually necessary in an effort to provide employment to their communities. This is actually a very tough dilemma since Indian gaming was implemented in large part to provide jobs and economic growth. Tribal leadership must assess the trade-off in providing too many jobs at the expense of the operations’ cash flow. In most cases, several positions can be eliminated or at least employees’ hours reduced. If the long-term result is improved numbers and greater ability to pay off or refinance debt obligations, the ends may in fact justify the means. Many tribal facilities and their respective governments have set solid examples by having third party assessments and strong human resource policies in place if reducing head count.
Employee benefits can also be very efficiently tweaked to improve cash flow, yet are another painful “hot button” area. Most operations can reduce portions of company contributions, matching retirement programs and obligatory paid time off; typically these programs can be reduced without being terminated to provide a solid compromise that can make a tremendous difference. Other areas worthy of scrutiny are vendor pricing (review all contracts to ensure best pricing; no one vendor should feel guaranteed the business), free meal programs (many tribes have opted to keep their elder programs but cut back on employee and tribal member benefits that often get abused and cost the gaming operation large sums), employee/tribal travel (too many conferences to choose from—must strive to be selective) and transportation costs (for both employees and patrons). Although painful, cost saving measures can be immediate, and the bottom line cash flow will realize an improvement rapidly.
Increasing Revenue
Implementing programs that increase revenue, while maintaining cost savings plans, is the obvious formula for success. Fortunately, increasing revenue through creative and innovative measures is much less painful than cost cuts and can actually be invigorating and exciting. Many tribal and commercial gaming facilities, forced to respond to the economic downturn, have found ways to increase revenue by expanding, creating and becoming proactive within the following areas:
Marketing—The cornerstone to gaming, media buys, direct mail, social media ads, new incentive programs, promotions and “giveaways” all help increase the customer visit and drop. It is important to know the market—what works and attracts in a specific gaming area/region (not anyone else’s necessarily).
Entertainment—Should be complementary (not detracting) to the gamer profile. New and exciting events should be explored for their ability to attract gamers that will stay and play—not simply to sell tickets and fill seats. Oddly enough, a revamp with this goal in mind often eliminates big expensive headliners and brings in fresh new events such as MMA fighting, wine tastings, local talent, reality/game shows, poker tournaments, etc.
Cultural Events—Without being exploitative, many tribal facilities are realizing that their gamers have an interest in their background and culture. In as much as it can be woven into the gaming visit, cultural displays, art shows, music, dance, comedy and native entertainment can be very attractive and successful.
Data Mining—Gaming operators must be able to assess and analyze the improvement (or lack thereof) in the form of financial reports showing comparative analysis and both actual reporting as well as forward-looking forecasting statements and budgeting.
Throughout this journey there have been a few interesting and exciting discoveries when launching the goal to improve the bottom line cash flow.
Cost Savings via Procurement Professionals—The gaming/hospitality procurement industry is rapidly growing and provides millions of dollars in cost savings to gaming enterprises. Through a process of technical and methodical bidding, pricing comparison, comprehensive preliminary planning, concise cost estimation/budgeting and experienced materials procurement, several firms provide these essential services.
New Culinary Offering/Cultural Presentation—Several tribal gaming resorts have reported positive feedback and increased attendance at special events centered around Native American-produced wine. Gaming patrons seem to appreciate not only the fine wine, but the story of sovereign earth and cultural traditions.
Most tribal gaming operators have actually appreciated the exercise forced on them by the economic crises and capital markets choppiness; reviewing and analyzing has led to surprising results—no more “asleep at the wheel,” “build it and they will come” attitudes. With a proactive, responsive, data-mining management mentality, the results are bound to only improve as the economy continues to rebound. There are obvious benefits derived from improving net revenue—operational efficiency and increased access to the financial markets certainly are at the top of the list. With the markets in an indefinite roller coaster mode, increased bottom line cash flow is an attainable solution that will provide steadiness through the ride.
Author’s Note: Information herein is obtained from sources that The PrinceRidge Group LLC believes to be reliable and accurate, but is not guaranteed as such. This is not a research report, nor a product of any research department. The above article should not be, and is not intended to be, investment advice by The PrinceRidge Group LLC or any of its employees. The above article is not an offer, recommendation or solicitation to buy or sell any financial products related to tribal gaming. The PrinceRidge Group LLC is not responsible for any investment that any investor may make in any financial products related to tribal gaming and each proposed trade or transaction should be analyzed by any investor in the context of its own objectives, overall portfolio, liquidity and risk tolerance. The PrinceRidge Group and its employees may execute trades, recommend trades, or have positions relating to the subject issuers that are inconsistent with the positions, if any, taken herein. Additional information is available upon request.