With increasing competitive challenges in the prediction markets, credit investors are demanding higher returns for holding corporate debt from casino and sportsbook operators.
In the last two and a half years, spreads on sub-investment-grade debt in the gaming sector have increased by 250 basis points, according to statistics from Bloomberg. This surge contrasts with a trend where credit spreads in most other sectors have tightened. Moreover, this trend coincides with a remarkable rise in activity on yes/no trading platforms. A recent analysis from Macquarie revealed that, aided by the World Cup, notional volume in prediction markets soared to $33 billion last month.
Credit spreads illustrate the yield disparities between high-yield bonds (such as those from many casino operators) and safer, lower-yielding options like investment-grade corporate bonds or U.S. Treasuries.
“The difference in yields for high-yield bonds reflects the additional credit risk investors assume for potentially higher returns from lower-rated bonds,” states Investopedia. “Fluctuations in these spreads can offer valuable insights into economic conditions and prevailing sentiment in the credit market. Changes in high-yield bond spreads can indicate variations in perceived default risk and investor confidence.”
The significant increase in credit spreads within the gaming sector becomes even more alarming when compared to similar industries like hotels, leisure, and restaurants, as noted by Bloomberg.
How Bond Markets React to Prediction Markets
The increase in junk bond spreads for the casino sector is not unexpected. Referring to research from Neuberger Berman, Casino.org reported last December that the growth of prediction markets could disrupt the credit landscape.
The asset management firm warned that junk-rated lottery operators might face risks due to the rise of all-or-nothing trading exchanges, advising credit investors to exercise “greater vigilance and discretion” when assessing debt from sportsbook operators. This caution is particularly relevant as some companies boost spending to establish themselves in the expanding prediction market arena.
iGaming and online sports betting platforms observed revenue growth in the early months of this year, demonstrating resilience amid heightened competition. Additionally, operators like DraftKings (NASDAQ: DKNG) and Flutter Entertainment’s (NYSE: FLUT) FanDuel are also leveraging their own prediction market capabilities.
Certain prominent investors express optimism regarding these sports wagering stocks, suggesting that regulatory and legal challenges will eventually catch up with entities trading sports contracts.
Factors Beyond Prediction Markets
While the rise in casino credit spreads is significant, it cannot be attributed solely to prediction markets. Some of this increase stems from industry consolidation which may impose additional liabilities on already indebted companies.
As Bloomberg reports, Tilman Fertitta’s proposed $17.6 billion acquisition of Caesars Entertainment (NASDAQ: CZR) is expected to add another $5 billion in debt to a gaming firm that is already grappling with nearly $12 billion in liabilities, thus raising its leverage to 7.5x.
Similarly, Barry Diller’s proposed takeover of MGM Resorts International (NYSE: MGM) necessitates financing, which means that if approved, the casino titan’s debt, which was estimated at $6.43 billion at the end of Q1, would significantly increase.