OREANDA-NEWS. Regionals in the U.S. gaming sector continue to benefit from easy year-over-year (YoY) comparables (comps), according to Fitch Ratings. However, Fitch remains skeptical of the year-to-date (YTD) regionals recovery as the sector continues to face secular challenges including proliferation in gambling alternatives such as higher denomination instant lottery tickets, slot machines at bars, casino-themed social games, and daily fantasy sports. Other negative drivers include stagnant income growth among the bulk of the population and the millennials' preference for less profitable non-gaming amenities at casinos.

Easy YoY comps and more affordable gas prices are masking secular headwinds, which Fitch expects will result in, at best, about flat same-store annual growth rates longer-term. We find positive U.S. economic indicators encouraging, which, if sustained, should support credit profiles given the relatively healthy operator balance sheets and free cash flows (FCFs). Our concern is greater with regard to slot suppliers in light of their higher leverage and weaker fundamentals. Still, positive FCFs, good liquidity, and increased diversification should keep slot supplier defaults at bay, at least in the near-to-medium term.

For states with static supply over the past few years (PA, MI, MS, IA, and MO) gaming revenues are up 3.2% YTD through May over 2014 same-period revenues but are down 1.5% relative to the 2013 same-period revenues. The decline relative to 2013 would likely be steeper if not for lower gasoline prices, which declined by about one-third YTD 2015 relative to 1H14 and 2013 prices. (Gasoline makes up 3%-4% of personal consumption spending).

Gaming operators expressed optimism during 4Q14 and 1Q15 earnings calls, saying that the consumer is looking stronger and that they are finding further efficiencies resulting in solid EBITDA flowthroughs.

Isle of Capri Casinos (ISLE), which has a fiscal year ending April 25, reported a 60% flowthrough in its fiscal 4Q15. However, the regional operators are in not in a rush to paydown debt. Boyd Gaming Corp and ISLE are ramping up capex to bolster existing portfolios, Penn National Gaming is debt funding its \\$360 million acquisition of Tropicana Las Vegas and Pinnacle Entertainment Inc. reduced its equity raise guidance to \\$450 million from the \\$1 billion original guidance.

Additional information can be found in Fitch Ratings' Gaming, Lodging and Leisure (GLL) electronic newsletter including brief sector comments, recent/upcoming events, and links/summaries to rating actions and detailed reports. Links to GLL-related reports/comments from other Fitch groups including Leveraged Finance, Credit Market Research, REITs, Public Finance, and Structured Finance can be found there.