US Fed Rate Cut Could Have Significant Impact on Gaming Industry

On Wednesday, September 18, the US Federal Open Market Committee (FOMC) announced its first interest rate cut in four years, reducing the benchmark federal funds rate by half a percentage point. This reduction brings the rate down to a new range of 4.75%-5%, a shift from the previous 5.25%-5.5%. Fed Chair Jerome Powell shared that the committee plans to further reduce rates by an additional 50 basis points by the end of the year and another 100 basis points in 2025. The next meeting to discuss monetary policy is scheduled for November 6-7.

This recent cut, the first since March 2020’s emergency move in response to the pandemic, comes after a period of elevated rates—the highest in 23 years—which had been in place since August. From mid-2020 to early 2022, rates were held near zero before the Fed initiated a series of hikes, pushing rates above 5% by July 2023. This week’s reduction marks a shift in the Fed’s approach.

As a consumer-driven industry, gaming stands to potentially benefit from the rate cut. Lower rates could mean consumers have more disposable income for leisure activities like betting. Additionally, gaming operators and suppliers might gain greater flexibility in financing new projects or pursuing mergers and acquisitions.

During a press conference, Powell highlighted the significant progress the US economy has made over the past two years. "Today, the Federal Open Market Committee decided to reduce the degree of policy restraint by lowering our policy interest rate a half-percentage point," Powell stated. He added, "This decision reflects our growing confidence that within appropriate recalibration of our policy stance, strength in the labor market can be maintained in a context of moderate growth and inflation moving sustainably down to 2%."

The cut, larger than the typical 25-basis-point move, sparked a mix of reactions. Some analysts are optimistic, seeing potential relief for consumers and businesses alike. Others are more cautious, worrying the cut might have come too late or could exacerbate inflation.

In August, the Fed’s preferred inflation gauge was recorded at 2.5%, a decrease from 2.9% in July and 3.7% in August 2023. With the Fed’s target inflation rate set at 2%, the current rate is within reach of the committee’s goal. This rate cut is part of the Fed’s broader aim for a “soft landing,” which would involve reducing inflation without triggering a recession. This delicate balancing act has often been compared to “carrying a piano down a staircase,” given its complexity.

Experts predict the rate cut could benefit the gaming industry in several ways. Rick Arpin, US gaming leader for KPMG, told iGB that the consultancy expects “a series of interest rate reductions” in the near future, aligning with both the Fed’s outlook and broader industry predictions. “If we see that, the impacts should include some relief for the more leveraged companies, an increased appetite for M&A, and some incremental ability for emerging companies to obtain financing,” Arpin noted.

Until recently, publicly traded companies dominated the gaming industry. However, a surge in private equity deals this year has raised questions about whether more aggressive deal-making might be on the horizon. Chris Grove, an industry analyst and sports betting investor, remarked that “cheaper capital is typically a tailwind for M&A.” With the US online gambling sector transitioning into a “new phase,” Grove believes there are “interesting companies that can help drive better product and margin gains.” He noted that the current sentiment seems to favor growth opportunities, suggesting “a meaningful uptick in transactions in the quarters ahead.”

In a column for GGB, Frank Fantini, founder of Fantini Research, pointed out that casino operators could be among the biggest beneficiaries of the rate cuts. He explained that operators have historically “relied on a fair amount of debt to fund growth,” and with the recent reductions, companies could refinance at lower rates, especially those with maturing debt. However, Fantini also acknowledged that many firms had already adjusted their balance sheets in response to the pandemic shutdowns.

Fantini cited research by Deutsche Bank analyst Carlo Santarelli, who identified five companies that stand to gain the most from the rate cuts. These are, in order: Golden Entertainment, Caesars Entertainment, Light & Wonder, Red Rock Resorts, and Penn Entertainment. All five companies are expected to see at least a 5% increase in discretionary free cash flow.

Before the Fed’s announcement, Fantini noted that real estate investment trusts (REITs) in the gaming sector, specifically VICI Properties and Gaming and Leisure Properties, had become more attractive to investors, with both reaching 52-week highs recently. He highlighted the advantages lower rates provide these REITs in making acquisitions and financing tenant growth. “In addition to the advantages lower rates offer in their efforts to make acquisitions and finance tenant growth, their dividends become more appealing compared to bonds,” Fantini argued. He noted that VICI’s dividend yield is currently 5.1%, while Gaming and Leisure Properties’ stands at 5.8%. Combined with stock appreciation, the total return becomes very attractive, especially to institutional and income investors.

By fLEXI tEAM