"The gaming industry experienced a greater impact from the difficult financial conditions for consumers in 2008 than many investors expected," Fitch states in its analysis. That having been said, Fitch predicted that the recent decline in gas prices, combined with the reduction in airline capacity, will have regional and local markets faring better than destination markets such as the Las Vegas Strip.

Calling 2008 one of the most challenging years in recent history, Fitch is forecasting the steepest GDP decline in the major advanced economies since World War II. The agency predicts that a decline in energy and commodity prices will not overcome the negative pressures of weak employment trends and a depressed real estate market and that US consumer spending will decline a sharp 1.6% in 2009 and remain soft into 2010.

While casino visitation has been shored up somewhat by promotions, the amount of money visitors are betting has declined. And with unemployment expected to rise significantly throughout 2009, Fitch believes that a gaming industry recovery is unlikely until 2010, particularly if capital markets remain weak.

"Continued weak capital markets and rising unemployment would lead to sustained pressure on retiree investment portfolios and consumer confidence, resulting in constrained consumer discretionary spending," Fitch states. "Therefore, Fitch's current Outlook incorporates operating declines in 2009 at best similar to 2008 on a same-store basis."

A number of issuers are at increased risk of bumping up against covenants in 2009, and will be approaching credit facility expirations in 2010-2011, making the bank lending climate increasingly important as 2009 progresses, Fitch states. Harrah's and Station attempted to address near-term maturities and/or heavy LBO-related debt loads with debt exchanges, but Station was unsuccessful and Harrah's has yet to complete the transaction, according to Fitch. MGM and Ameristar are other issuers with notable refinancing risk that will become more concerning as 2009 progresses, although MGM has recently enhanced its liquidity profile with the Treasure Island deal, Fitch states.

"It is clear the terms will be much more costly than those of the existing agreements that were entered into during a more accommodating credit environment," Fitch reports. "In addition, there may be downward pressure on the size of the commitments as investment banks seek to limit their own balance sheet exposure, as was the case in Mohegan's credit facility amendment on Dec. 10. Downsized commitments will contribute to a slower growth rate for the industry over the next three-to-five years."

Beyond the credit issue will be the supply issue. Some 15,000 hotel rooms will be added to the market between now and early 2010, increasing the supply by more than 10% and putting downward pressure on occupancies and room rates that are already on the decline. Upcoming deliveries include Wynn Encore, the Caesars Palace expansion, Citycenter, and Fontainebleau.

Fitch believes Wynn is extremely well positioned but remains cautious on the credit profiles of MGM, LVS, and Harrah's. "In addition, the Las Vegas Locals market needs to absorb the Eastside Cannery, Aliante Station, and M Resort supply additions, which will have a notable impact on both Station and Boyd," states the report.

A prolonged US recession that extends beyond 2009 and into 2010, coupled with an extremely tight credit environment, will put significant additional pressure on the balance sheets of already stressed corporate gaming operators, Fitch predicts. "There was a significant tick up in high yield (HY) gaming defaults in 2008, with five issuers (French Lick, Tropicana, Greektown, Herbst, and Majestic Star) defaulting on $2.3 billion of HY market principal through November 2008," the report states. "Three other issuers (Trump, Station, and Harrah's) are on the cusp of defaulting on debt obligations."

The overall situation has gaming operators desperately seeking liquidity. Numerous operators halted most planned and current construction projects and maintenance work, reducing their cap ex for 2009, and also reduced their headcount. Several companies also began exploring the sale of non-core assets, and at least one has already taken it a step further. MGM Mirage, which said in November it was considering the sale of on-core, non-operating assets to improve liquidity, instead agreed to sell Treasure Island to Wichita billionaire Phil Ruffin for $500 in cash and $250 in notes due over the next two years.

To the extent that credit markets remain tight, Fitch believes there will be increasing pressure for companies to engage in both casino and non-operating asset sales in 2009. Fitch also believes potential buyers are limited and credit markets conditions will make it difficult to complete a transaction.

"Penn National and Boyd Gaming, with their relatively more attractive balance sheets, may be able to consider operating asset purchases early in the credit stabilization cycle," Fitch states. "Wynn also maintains an attractive liquidity profile and clearly has the balance sheet to be a buyer [but] the company may be more inclined to purchase attractive real estate for future development rather than operating assets that are not a strategic fit with its brand."