Wynn Hit With Lawsuit And Credit Outlook Revised To Negative

About: Wynn Resorts, Limited (WYNN)
by: Spencer Osborne

A Shareholder derivative lawsuit has been filed.

Moody's has downgraded Wynn credit to negative.

The sidelines may be the best place to be while the storm plays out.

On February 7th, I published an article about Wynn Resorts (WYNN) titled, "Steve Wynn Steps Down As CEO - Equity Impacts." In the article, I discussed the fact that the brand of Wynn Resorts was Steve Wynn, and while many of the fundamentals have not changed that the equity could take a hit. I also put forth the thesis that until the storm clouds cleared that it may be best to either trim a position down or step to the sidelines.

Today, it is clear that the storm clouds are out in full force. We have a derivative lawsuit filed against the Board of Directors, a credit downgrade by Moody's, and the Commonwealth of Massachusetts launching an investigation into whether the mega $2.4 billion casino project already underway in its state is worthy of a license. These latest developments put a quick stop on an upward recovery move in the stock, and as of this writing, Wynn is hovering just above $170 per share.

The Lawsuit(s)

In my opinion, we will see class action attorneys circling the wagons on this matter. The Norfolk County Retirement System filed a suit in Clark County alleging that the Board of Directors was aware of sexual misconduct by Steve Wynn and that the board breached its fiduciary responsibility to investors by not investigating and handling the matter properly.

In my opinion, we will see more suits filed over time. Typically, such suits get joined together. THE risk associated with such suits is that they can drag out for quite some time. Thus far, the damages are less than 20%, so that would factor in as well. That being said, the dates of when material damage have taken place have not been established, so that percentage of damages could be impacted.

Class action suits transpire with some degree of frequency, and there are even law firms dedicated to shaking the bushes to drum up a case or even a lead plaintiff with standing. In my opinion, and at this juncture, the lawsuit noise is more bark than bite. It does add risk and negative publicity though.

The Credit Rating

The move by Moody's is likely more important to the company as well as its investors. Operations like Wynn rely heavily on credit, and seeing a rating dropped to negative is certainly not good news. This is especially true when multibillion-dollar projects are already underway.

The negative rating actually demonstrates my previous article's statements that Steve Wynn is a fixture of the brand and that Wynn Resorts without Steve Wynn should be a big concern.

"The revision of Wynn Resorts' outlook to negative considers Mr. Wynn's decision to step down from the company in the wake of sexual misconduct allegations made against him," stated Keith Foley, a Senior Vice President at Moody's. "Although the claims against Mr. Wynn are only allegations, the reputation, financial performance, and licensing status of the Wynn Resorts' casino assets, which bare Mr. Wynn's name, could be harmed, albeit by perception alone," "The outlook revision to negative also considers that Wynn Resorts will lose access to Mr. Wynn highly-regarded development and operational expertise as he will no longer be part of the company's management," added Foley

Moody's raises serious concerns. These concerns are very real at the moment. Over time, some of those concerns may ease, but the question is how much damage this initial storm delivers. It is prudent in the immediate term to step back. If this storm passes without causing too much damage, being conservative will not have lost you anything. If the storm causes major disruption and/or destruction, being conservative could save the college fund.

The Commonwealth Of Massachusetts

I happen to be from Massachusetts. I happen to fully grasp that the populous here is very much left of center on the political spectrum. I also happen to know that the #metoomovement has taken center stage and that being caught up on the wrong side of that movement can put a big target on one's back. I will be blunt. Steve Wynn is currently on the wrong side of the movement and politicians will look for just about anything to score political points.

The Wynn Resort in Everett Massachusetts, called Wynn Boston Harbor was great political fodder when the discussion was on jobs creation and the tax roles that would be bolstered by a mega casino in the state. That is now the past (the project is already underway). The current wind that is blowing is one of whether being on the right side of the movement is politically expedient. One recent article about the subject stated the following with respect to the attitude of Commonwealth officials:

Gaming Commission officials have said any finding about the suitability of Steve Wynn and other officials at the company will potentially impact the suitability finding for the company as a whole. Commission officials have said one option available to them is to withdraw the company’s casino license, which could jeopardize the company’s $2.4 billion investment in a casino under construction in Everett

Wow! As a person that is in the development industry in the region, I can tell you that there is nothing more scary than the power wielded by local and state political officials. Can you imagine being just 16 months away from completion of a $2.4 billion project and having a gaming license called into question?

Now, it is my opinion that the project will keep moving forward and finish. It is my opinion that the gaming commission will grill Wynn Resorts on this for many months. It is my opinion that Wynn Resorts will have this cloud over its head throughout 2018. That is not something that instills investor confidence. When political bodies investigate things, they do not tend to do so with an expedited timeline in mind.

Even if all of this blows over in the weeks ahead, there will be lingering issues that the company will need to contend with and investors will need to consider. Lawsuits do not typically fade away. Credit ratings take time to repair. Political players do not move swiftly. Unfortunately, it will be difficult to Win with Wynn in the next several months. This story simply has some pretty big wings! Stay Tuned!

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.