LAS VEGAS — How do you know the economy is coming back? High rollers are paying their gambling debts.
All four major US casino corporations bumped up their allowances for bad debt during the recession, with one company estimating that fewer than half of outstanding debts would be repaid. Now, companies have lowered their estimates to prerecession rates.
The casino business was among the industries hardest hit by the economic downturn and has been slower to recover. Only now are visitor numbers returning to 2007 levels in Las Vegas, and gambling revenue has not completely bounced back. Even during fat times, most patrons were never offered the opportunity to gamble on credit, making this quirky economic indicator one of the lesser known corners of the gambling world.
A look at how the other half gambles:
■ Why do casinos allow high rollers to take on debt?
No one likes to give away money, but casino bosses believe they must issue credit to their best customers or risk losing their business.
Rob Goldstein, president of global gaming operations for Las Vegas Sands, says casino companies would be at a ‘‘significant competitive disadvantage’’ if they didn’t offer credit in Las Vegas, the home of high-end gambling in the United States. On the Strip, it’s not uncommon for big spenders to place million dollar bets on a single roll of the dice. Regular players, of course, play on their own dime.
■ Why are gamblers paying off their debts now?
Las Vegas executives say people are especially likely to skip out on their gambling losses when times are hard. While other kinds of companies can threaten to repossess high-end purchases, casinos ask gamblers to pay debts on experiences that are intangible, and, worse, already over. As 2008 drew to a close, casinos jacked up their estimates for how much of their outstanding debt would go bad. Wynn Resorts Ltd. increased its rate by 40 percent, estimating that fewer than half of debtors would pay up.
Now, with the economy strengthening, people once again seem comfortable spending their money on gambling. The amount of money wagered at Las Vegas casinos has steadily grown every year since 2010, as has the number of gamblers coming through. Still, casino executives tend to adopt a conservative attitude toward balancing their books, in part because the business relies almost entirely on discretionary spending.
■ How much money are we talking about?
Casino companies write off tens of millions of dollars in bad debt each year. Last year, Sands’ provision for doubtful accounts — the amount of old debt the company thinks might go bad — rose to $492 million. Caesars Entertainment Corp’s allowance was $202.2 million, and Wynn and MGM Resorts International both made allowances of about $100 million.
That sounds like a lot of money, but it’s a pretty small chunk of these companies’ income. Sands, for instance, reported more than $1.5 billion in profit last year and $9 billion in revenue from its gambling operations. Wynn reported about $500 million in profit, and $4 billion in gambling revenue.
An AP analysis found that the four US gambling giants set dramatically different bad debt rates. Sands, controlled by billionaire Sheldon Adelson, is generally the most optimistic, estimating that it will get back about 75 percent of its outstanding debt. Wynn budgets for the highest number of deadbeats, estimating that less than two thirds of its outstanding debt will be repaid. MGM and Caesars, which do less business in Asia, rank in the middle.
■ How do casinos collect? By breaking kneecaps?
Casinos have limited options when their best customers turn into liabilities. They generally negotiate with the gamblers and, as a last resort, file lawsuits. But that’s no guarantee companies will collect. In one high-profile case, Nebraska businessman Terrance Watanabe was indicted by a grand jury for failing to pay $14.7 million in debts he incurred at Caesars Palace and the Rio Hotel Casino in Las Vegas. He turned around and sued Caesars Entertainment, saying the company plied him with alcohol and painkillers without a doctor’s prescription, rendering him incapable of gambling responsibly. He ended up paying only $100,000 when the two parties settled in 2010.
■ What happens if a high roller isn’t from the United States.?
Overseas, collection can be much harder. In China, the world’s largest gambling market, casino debts are not legally enforceable. Over the summer, a bilingual Chinese website posted a list of high rollers the site said were dodging debt. The site offered bounties for tracking the deadbeats down. Sands has recently begun increasing its cushion for bad debt because of problems with collections in Singapore, where high rollers sometimes take out hefty lines of credit and then leave town. Goldstein says that in most Asian countries, Sands has ‘‘absolutely no recourse’’ if someone decides to walk away from debt.
■ It seems that casinos expect a lot of bad debt. Is that normal?
Forecasts are a fungible number, and one that might be massaged to meet quarterly financial goals. Across the board, however, casino companies take a more skeptical view of the creditworthiness of their customers than other kinds of businesses. Last year, Hertz estimated it would have to write off about 1 percent of the money it was owed. Chrysler guessed 5 percent, and Target’s credit card business estimated 6 percent.
John Kempf, a casino industry analyst at RBC Capital Markets, says casino companies tend to set higher allowances for debt because they depend on a few individuals to pay up. In some cases, a single customer might make up a quarter or more of a casino company’s outstanding debt. Casinos are also unique in that they sometimes volunteer to forgive debt to keep big spenders coming back. ITG analyst Matthew Jacob says debt forgiveness has become another perk — just like comped meals, free suites, and private jet rides.
Another reminder that in good times or bad, if you gamble it’s nice to be a high roller.