Las Vegas takes ratings hit as coronavirus keeps tourists away
Citing its dependence on tourism, Fitch Ratings downgraded Las Vegas AA-minus from AA Monday and revised its rating outlook to negative.
Nevada Gov. Steve Sisolak began a limited re-opening of the state April 30. The governor's stay-at-home orders amid the pandemic had emptied the normally bustling Las Vegas Strip.
Las Vegas, a city of 640,000, is Nevada’s largest city and the state’s economic center. It is also part of the 2.3 million-strong Las Vegas Valley.
The city’s limited tax general obligation bonds fell to AA-minus along with the long-term issuer default rating. The Series 2004A LTGO bonds issued by Las Vegas Special Improvement District No. 1481 were downgraded to AA-minus from AA.
The LTGO bonds carry the city's full faith and credit pledge for payment, subject to statutory and constitutional limits on the amount of ad valorem taxes it may levy.
Fitch cited "an expectation of drastic, near-term revenue losses given the city's reliance on tourism-related spending and the possibility of a prolonged recovery that could lead to budget pressure for an extended time period."
The negative outlook indicates the rating may be downgraded over a one- to two-year period; however, it does not imply a rating change is inevitable, according to Fitch.
"Las Vegas relies heavily on tourism, a sector that is facing particularly steep declines due to containment measures," according to Fitch analysts.
Sisolak declared a state of emergency March 12 that prompted a sequence of shelter-in-place measures, including closing the casinos throughout the state on March 18.
The order caused an immediate spike in unemployment since more than 300,000 residents in the region work in gaming, entertainment, and hospitality, according to Fitch. The shelter-in-place measures were extended to May 15 from an original stop date of April 30, though the governor has started a phased re-opening that promotes continued social distancing.
Timing of the casinos' reopening will be determined by the Nevada Gaming Control Board. The Board's reopening plans include a maximum 50% capacity in gaming establishments, clubs remaining closed indefinitely, and machines being spaced at lengths recommended by the Centers for Disease Control, according to Fitch.
"The city is facing the risk that there will be continued hesitation to travel even as the economy begins to open and that consumers will be less able to spend on discretionary items like gambling and entertainment," Fitch wrote. "Furthermore, the Gaming Board's current re-opening plans that detail casinos' abatement measures and capacity limits, coupled with a temporary loss of entertainment options, could alter visitor numbers for an indefinite period of time."
Fitch projects gaming revenues will be down nearly 34% in 2020 and 5% below 2019 levels in 2021. The city is anticipating a $50 milion hit to the budget with it falling to $570 million in fiscal 2020, a 3.7% drop from the prior year. It also anticipated revenues will drop an additional $10 million in fiscal 2021.
The biggest drop is anticipated in C-taxes, which are primarily sales taxes collected by the state and distributed to localities based on a formula that takes into account a base allocation, population and assessed value.
Fitch “expects the city to take necessary steps to align expenditures with revenue losses, but the severity of revenue losses could put negative pressure on the city's operating performance. The ratings agency expects the direction of the city's credit quality to become clearer only after the immediate health crisis subsides and effectiveness of the city's fiscal response comes into view.”
Fitch cited the city’s strong operating performance, evidenced by its ability to align expenditures with falling revenues and rapidly rebuilding reserves for keeping the rating in the AA-range.