Overview of Neuberger Berman’s Concerns

The continued rise of prediction markets heightens competition in the gaming industry, and that could be a drag on some noninvestment-grade issuers, according to Neuberger Berman.

In a recent report, the asset manager says the “nearly instantaneous nationwide legalization” presented by prediction markets presents a threat to established gaming markets. In terms of possible credit market impact, Neuberger Berman highlighted lottery operators as potentially vulnerable to the surges of yes/no exchanges.

We believe noninvestment-grade issuers in the lottery space, which until now have enjoyed virtually no legal gambling competition in some jurisdictions, may be negatively affected,” notes the money manager.

In the US, publicly traded lottery operators include Brightstar Lottery (NYSE: BRSL) — the company behind Powerball — and Lottery.com (NASDAQ: SEGG). Both carry junk credit ratings.

Sports Betting and Prediction Market Expansion

Aside from mentioning plans by DraftKings (NASDAQ: DKNG) and FanDuel to enter the prediction markets realm, Neuberger Berman didn’t mention specific sportsbook operators, but the asset manager notes the spending will be significant.

“Recent announcements by FanDuel and DraftKings to enter the prediction market space with hundreds of millions in start-up spending also seem to suggest they are chasing the large opportunities associated with significant market change,” observes Neuberger Berman.

The asset manager adds that as prediction markets take shape and expand, market participants should apply “greater investment vigilance and discretion.”

FanDuel parent Flutter Entertainment (NYSE: FLUT) has a BBB- credit rating, which is the lowest investment grade, while DraftKings’ highest credit rating is BB+ — the highest junk grade — courtesy of Fitch Ratings. Other digital sportsbook operators tied to parents with non-investment grades include Caesars Entertainment (NASDAQ: CZR) and Penn Entertainment (NASDAQ: PENN), but those are major brick-and-mortar casino giants that, for now at least, appear to be avoiding massive expenditures tied to prediction markets.

States ‘Sidelined’ by Current Prediction Market Structure

One of the primary reasons prediction market operators like Kalshi and Robinhood are facing a plethora of legal challenges is because they don’t have state gaming licenses, meaning there’s no way for states to tax event contracts as they do with sports betting in the jurisdictions that allow it. Neuberger Berman acknowledges the states are “sidelined” with respect to collecting prediction market taxes, but that could compel them to approve other forms of betting to bolster revenue.

In the meantime, this nearly instantaneous nationwide legalization of a gambling-adjacent product threatens to disrupt existing gambling markets. It may also lead to a proliferation of gambling legalization across the country, as states compete to retain potential taxable revenues within taxable gambling products,” adds the money manager.

Neuberger Berman agrees with the assessment put forth by other experts that it will likely require a Supreme Court ruling to gain jurisdictional and regulatory clarity on prediction markets, but such a decision “may take many years.”