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As Tourism From China Plummets, Investors Shun Macau Casinos' Bonds

The damage to Macau's casinos is a direct result of China's strict zero-Covid policy. This policy is not only causing damage to the mainland economy, but also to economies in other parts of the world.

September 22, 2022
7 minutes
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Macau's casinos are feeling the squeeze from a slowdown in Chinese tourism, and their bond prices are suffering as a result.

Bond prices for Wynn Macau Ltd. have fallen to as low as 68 cents on the dollar, a level more typically associated with distressed debt. A bond from MGM China Holdings Ltd. that matures in 2027 was trading at around 76.6 cents on the dollar Wednesday, according to FactSet. Casino bonds maturing in 2024 are yielding more than 15%.

The selloff of bonds issued by Macau's casinos is due to several factors, including uncertainty about which of them will be allowed to renew their licenses this year. But a key factor is the virtual collapse of Chinese tourism to Macau, which was once a huge source of revenue for casinos in the city.

According to government figures, the number of mainland visitors to Macau in the first half of this year fell by 78% compared to the same period in 2019. Gross gambling revenue also fell by 82%, to $3.25 billion from $18.5 billion.

The damage to Macau's casinos is a direct result of China's strict zero-Covid policy. This policy is not only causing damage to the mainland economy, but also to economies in other parts of the world.

According to Vitaly Umansky, senior analyst for global gaming at Sanford C. Bernstein, it is difficult to predict when businesses will begin to reopen and when they will become cash-flow positive.The gambling industry in Macau is the biggest employer in the city, so casinos have been unable to significantly cut costs by laying off staff. Instead, they have had to look for other ways to reduce expenses."You will eventually need to reduce expenses because you will not have an infinite amount of money," said Mr. Umansky.

According to Colin Mansfield, head of U.S. gaming, lodging and leisure at Fitch Ratings, the lack of visitors from mainland China could translate into refinancing risks for casinos in the next few years.

According to Mr. Umansky, Macau's six casino operators have enough liquidity to last for the foreseeable future - from eight months to over two years, depending on the company. Even if their revenues only recover to 30% of what they were before the pandemic, most of them would be able to stop losing money.

James Goldstein, a gambling and retail analyst at CreditSights, said that investors had been expecting things to improve, but that the bad news has only gotten worse. Macau had its first major Covid-19 outbreak this summer, and the government’s strict response has made a near-term recovery in the sector even less likely. Macau’s economy, which is highly dependent on its casinos, contracted 39.3% in the second quarter, according to official sources. According to Mr. Goldstein, people are becoming impatient with the idea that the recovery is coming, but it never seems to materialize.

Investors are looking for signs as to whether China might begin to loosen Covid restrictions after the Communist Party congress in mid-October. However, there is still no clarity on when any opening up in China might happen.

Gloria Tsuen, a senior credit officer at Moody's Investors Service, said that people need to see some light at the end of the tunnel. "People need to see that at least a trend is going in the right direction as opposed to continuing in the current path," she said.

Macau's casinos are looking for alternative sources of funding as the prices of their bonds fall. Wynn Macau said in June that it would get a $500 million revolving loan from its U.S. parent at a 4% interest rate. The following month, Sands China Ltd. received a $1 billion loan from its parent, payable in July 2028.

According to Mr. Goldstein of CreditSights, the Macau casinos of Las Vegas Sands Corp. and Wynn Resorts Ltd. have enough liquidity to keep them afloat for more than two years. Las Vegas Sands Corp. had $2.8 billion in liquidity in the second quarter of 2022, while Wynn Resorts Ltd. had $1.8 billion.

Las Vegas casinos have been generating more than a billion dollars in gambling revenues each month for the past 17 months. In contrast, casino revenues in Macau fell to a record low of just $49 million in July, when all casinos in the city were shut down for nearly two weeks due to a citywide lockdown.

The strength of Las Vegas' gaming industry has provided some relief to several Macau casinos. MGM and Wynn, who both operate casinos in both cities, are better able to weather the downturn than SJM Holdings Ltd., which operates solely in Macau, said Ms. Tsuen. Las Vegas Sands, who sold its Vegas properties for approximately $6.25 billion to focus on its Asia operations, is supported by its casino resort in Singapore.

There are seven companies vying for six gambling licenses in Macau, with the current concessions set to expire at the end of the year. The six incumbents are thought to have an advantage, but the surprise challenger may just have a shot. MGM, SJM, and Genting did not respond to requests for comment.

Macau casino stocks rallied on Tuesday after Hong Kong said it was working on easing the quarantine restrictions that have limited travel between the two cities. However, all four stocks fell the following day.

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