Macau Operators Stare Down Credit Risk Amid Government Proposals

Posted on: September 28, 2021, 01:42h. 

Last updated on: September 28, 2021, 02:04h.

Todd Shriber @etfgodfather Read More
Expertise: Financial, Gaming Business, Mergers and Acquisitions.

The six Macau concessionaires, including Las Vegas Sands (NYSE:LVS) and Wynn Resorts (NASDAQ:WYNN), could contend with elevated credit risk as authorities there pursue an agenda that could lead to increased oversight of the gaming industry.

Macau operators
Part of the Cotai Strip in Macau. Moody’s says operators there could face credit risks. (Image: YouTube)

Moody’s Investors Service says changes to the special administrative region’s (SAR) casino guidelines being discussed in an ongoing consultation period could be “credit negative” for operators in the world’s largest gaming hub.

Because the consultation document highlights the government’s intention to strengthen its regulatory scrutiny and supervision over the gaming sector,” said the research firm.

Moody’s has a Baa3 rating on Las Vegas Sands, or one notch above junk territory. The ratings agency grades SJM Holdings Limited Ba1, Melco Resorts & Entertainment (NASDAQ:MLCO) Ba2, and Wynn and MGM China parent MGM Resorts International (NYSE:MGM) Ba3. The credit grader has “negative” outlooks on all of those issuers.

Trying Environment for Macau Operators

Last week, shares of all six Macau concessionaires stumbled. That’s as local authorities launched a consultation period that includes proposals such as increased government equity ownership, restrictions on how operators spend capital, including dividend payments, and the possibility of upfront payments required to retain licenses.

Moody’s analysts say they expect the six concessionaires will be permitted to continue operating in Macau beyond the June 2022 expiry of gaming permits. But the local government could require an unknown amount of upfront capital to extend those licenses. Additionally, there’s concern authorities could trim the license period to 10 years from 20 years.

There’s “a chance that the Macau government may require a one-off lump-sum payment,” adds Moody’s, while noting when those payments would be required and at what size are unknown.

Regarding potential renewal risk, Moody’s points to the three US-based Macau operators — LVS, MGM, and Wynn — citing “uncontrollable geopolitical issues.” However, the research firm doesn’t say that risk is alarmingly high, and some executives remain optimistic that their companies will continue doing business in the SAR.

No Downgrades…Yet

In assessing how a stricter regulatory environment could affect Macau operators, Moody’s didn’t go so far as to downgrade credit ratings on any of those companies.

Additionally, there’s recent evidence confirming capital markets are open to these casino operators. For example, Sands China — the Macau arm of LVS — priced $1.95 billion of senior unsecured notes earlier this month. That was followed by Wynn Macau borrowing $1.5 billion.

Despite the specter of increasing regulatory pressure, some investors are bullish on LVS and Wynn, and betting that the operators of a combined seven Macau integrated resorts are value plays on a yet-to-materialize rebound in the casino center.