Appetite for casino debt high, providing resort financing options

Volume in Asia’s debt capital markets has hit record highs in the year to date, providing an ample pool of liquidity for casino operators should they decide to raise funds through bond issues to finance multi-billion dollar projects planned for the region, analysts say.

Global corporate investment grade debt capital market volume has risen to a record $975.6 billion year to date, through 2,698 deals. That’s up from $951.3 billion in the same period of 2013, according to figures from Dealogic.

Of that, $287.2 billion has been raised by companies in North Asia, also a record.

Casino firms are in demand from bond investors given their strong cash flows, with the CEO of Caesars Entertainment Gary Loveman saying recently that he foresaw no problem in funding a substantial portion of a potential $5 billion project in Japan through the debt markets.

“Macau casino firms are in a sound financial position to raise funds in the capital markets,” said one analyst with a European bank.

Traditionally, casino companies in Asia have relied more on bank financing to construct their projects, unlike in Las Vegas where the industry was constructed on bonds.

However in recent years, bonds have become increasingly popular, as the market in Asia reaches a depth and maturity to become a real option for companies seeking finance.  Morgan Stanley expects the size of the market to reach $1 trillion in three years with issuance in 2014 of $150 billion.

Last October, Wynn Macau sold $600 million in eight-year 5.25 percent notes, with the yield dropping about 29 basis points in the first two weeks after issue due to strong demand, according to Bloomberg data.

In the first nine months of last year, gaming casino companies in Asia issued $1.98 billion in bonds compared with $23.8 billion sold by real estate entities in the region. This year there has been mounting concern over China’s slowing economy and overheated real estate market, amplifying the relative appeal of gaming debt.

At present, Macau’s major operators are not expected to raise fresh capital for their Cotai integrated resort projects, even though some are experiencing cost overruns.

“There is not a strong need for fresh capital given that the Cotai projects are largely funded already,” Michael Paladino, senior director at Fitch Ratings told AGBrief in an email, adding that the rating agency doesn’t expect negative pressure on the credit ratings among the casino firms operating in the former Portuguese enclave.

SJM for example has more than HK$20 billion cash ($2.5 billion) on hand to fund its HK$30 billion project on Cotai Strip, with more than HK$8 billion in operating cash flow.

The company, whose market share has been under pressure due to capacity constraints at its existing facilities, had outstanding debt of HK$1.4 billion as of the first quarter.

According to recent a recent Fitch report, Galaxy Entertainment will finance its $2.5 billion Galaxy Macau project through cash on hand and existing finance arrangements, with no new debt facilities announced since 2012. As of end March, the company had net cash of $11.3 billion and remained virtually debt free.

MGM China upsized its Macau credit facility to $2 billion in October 2012 to accommodate its Cotai project, with the financing consisting of a $550 million term loan and a $1.45 billion revolver, while Wynn Resorts also increased its credit facility in that year to $2.3 billion for its Wynn Palace stage 1, according to Fitch.

Melco’s arrangements for its Studio City project are more complicated, according to the report. Studio City is 60 percent owned by Melco and will be funded through a $1.4 billion credit facility and at least $850 million in pro-rata equity contributions.

The company said recently that it’s increasing the budget for its resort on Cotai by about $300 million, taking the total cost to $2.3 billion, while it also upped the budget for its City of Dreams Manila project from from $680 million to $832 million.

“Among the six majors, Melco Crown could be the first to raise capital given its complex funding structure and expansion plans in different jurisdictions,” the analyst said.

In fact, to finance the increase in the Philippines’ project, Melco chose to tap the equity markets, rather than debt, raising 5.5 billion pesos ($127 million) through a share placement. However, this is not seen as a likely trend.

“Even in the worst case scenario, major casinos in Macau would tap on banking borrowings or bond issuance since the cost of raising capital in equity is much higher than the two former solutions,” said a banker who was involved in the sale of Wynn’s bonds last year.

Analysts also said a recent scheme to connect the Shanghai and Hong Kong stock exchanges will also underpin demand for gaming company stocks and bonds, with mainland investors having no opportunity for exposure to the sector in domestic markets.
Fitch said a lot of the outstanding debt is variable/ floating rates but HIBOR/ LIBOR rates would have to increase drastically for operators to consider refinancing with fixed-rate bonds, which are also more expensive.