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Fitch: State-Level Online Gaming Momentum Continues

NEW YORK–(BUSINESS WIRE)–

The rollout of state-level online gaming continues to pick up traction
with New Jersey, Nevada, and Massachusetts recently passing or
considering online gaming legislation and Fitch Ratings believes that
state-level online gaming could become operational by the end of this
year or early next year. Longer term, a successful initial rollout in
states like Nevada, New Jersey, and Delaware would spur an acceleration;
other gaming states would move quickly to adopt similar measures if the
regulatory, legal, practical, and social hurdles and concerns prove
manageable.

On Tuesday, New Jersey Governor Chris Christie signed an online gaming
bill, paving the way for the state to become the most meaningful
individual state to pass online gaming legislation so far. This was
largely anticipated following his conditional veto on Feb. 7 of an
online gaming bill passed by the state’s legislature in December 2012.
Governor Christie pushed for an increase in the gaming tax rate to 15%
from 10%, a 10-year sunset provision to allow for a review of online
gaming in the state, and additional safeguards.

We believe the passage of online gaming in New Jersey is a positive
ratings consideration for Borgata and to lesser extent for Caesars
Entertainment Corp (Caesars). We rate Borgata’s issuer default rating
(IDR) ‘B-‘ with a Stable Rating Outlook and Caesars’ IDR ‘CCC’ with a
Negative Rating Outlook. (Marina District Finance Company, Inc. is the
issuing entity for Borgata).

Nevada and Delaware previously passed online gaming legislation, but
their population bases are much smaller and therefore less meaningful on
a stand-alone basis. Nevada rushed to pass a bill last week allowing it
to enter into agreements to pool players with other states as passage of
the New Jersey bill became apparent. The Massachusetts legislature also
recently introduced two bills related to online gaming encompassing the
ability to sell lottery tickets over the internet and the ability to
grant internet gaming licenses, providing additional political momentum.

Nevada’s legislative action reinforced our view that the state will
continue to strive to remain at the forefront of the evolving gaming
industry and recognized its online gaming market would be limited on a
stand-alone basis. As gambling has become more socially accepted and
proliferated across the United States over the past 25 years, we have
seen states become increasingly competitive with respect to gambling
expansion initiatives.

Gaming expansion typically follows a path of least resistance to
establish initial operations, then grows from there. For example,
language in the 1988 Indian Gaming Regulatory Act permitted “electronic,
computer, or other technologic aids” to bingo ultimately resulted in
slot-like terminals initially and full-service casinos over time,
fuelling what is today a $27 billion Native American gaming industry.
Rarely do we see a contraction of gaming offerings. The potential
agreements to pool players between states as contemplated by the Nevada
bill can likely be attributed to similar practices in the lottery
industry, such as Powerball.

New Jersey was incentivized to be an early mover with online gaming, as
its gaming revenues have declined from a peak of more than $5 billion in
2006 to its current level of roughly $3 billion as Pennsylvania and New
York gaming markets ramped up. Implementing online gaming may help
offset concerns relating to the possible gaming expansion in New York in
the near term and an additional Philadelphia casino longer term. If the
New York legislature passes an expansion bill this session (which may
include table games at Aqueduct and Yonkers), the measure will go to a
referendum this November.

The biggest question surrounding online gaming expansion is whether an
acceleration of state-level gaming initiatives spurs federal-level
regulation at some point over the next several years. We believe this is
possible, but not necessarily probable. In the meantime, New Jersey,
Nevada, and Delaware are bearing the initial implementation risk, but we
expect other states to follow aggressively if operations commence
without material issues.

For more information this topic, please see our reports: “Fitch:
Imminent Online Gaming in N.J. Positive for Borgata Caesars,” dated
Feb 19, 2013 and “States and Locals Turn to Gaming: Expansionary Trend
Will Produce Winners and Losers,” dated Sept. 20, 2012 both available at www.fitchratings.com.

In addition, we regularly summarize various online gaming bills and
provide an overview of recent trends in online gaming and of companies
that may benefit from proliferation of online gaming in the U.S in
Fitch’s Online Gaming Monitor, last published on Feb. 19, 2013

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit
market commentary page. The original article, which may include
hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com.
All opinions expressed are those of Fitch Ratings.

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