Macau’s recovery will take years, says Fitch Ratings
Posted on: October 14, 2022, 04:50h.
Last update on: October 14, 2022, 04:58h.
The story of Macau’s recovery from the coronavirus pandemic is ongoing and is taking much longer than game companies and investors had hoped. It is also clear that the road will be loaded with debt.
Amid persistent COVID-19 protocols keeping visitors away from the casino hub and hammering gross gaming revenue (GGR), there is a slippage. Analysts predict it will be years before it resembles pre-pandemic levels. In a recent report, Fitch Ratings predicts that Macau’s GGR from 2022 to 2024 will reach 27%, 50% and 70% of 2019 rates respectively.
Macau’s COVID testing/quarantine policies have changed frequently over the past few years. The resumption of play could be delayed with the reinstatement of tighter restrictions with higher infection rates,” noted the research firm. “China’s slowing economic growth could also negatively affect the resumption of play, including for valuable premium and high-end mass players.”
China’s zero COVID policy puts pressure on Macau dealer balance sheets. Morgan Stanley estimates that in the third quarter, limited operating capacity caused gaming companies to burn $1.5 billion in cash, compared to $1.4 billion in the previous quarter.
The enigma of the capital of Macau
As dealers take on debt just to stay afloat while they wait for a return to normal, Morgan Stanley estimates Macau operators’ combined debt burden to be $24 billion, a nearly five-fold increase since the start of the coronavirus crisis.
Thus, access to capital markets is increasingly difficult, especially for dealers listed in Hong Kong.
“Access to capital for Hong Kong-listed operators’ subsidiaries, which are the major issuers of debt associated with Macau operations, is likely to remain constrained until the GGR recovers to levels closer to 2019 and the regulatory overhead of gaming concessions is easing,” adds Fitch. . “Refinancing needs are modest until 2024, when some subsidiaries begin to face debt maturities, when the risk of a concession renewal event will no longer be a concern.”
Las Vegas Sands (NYSE:LVS) and Wynn Resorts (NASDAQ:WYNN) — two of Macau’s three U.S.-based operators — are providing capital to their Chinese units. In July Sands loaned $1 billion to Sands China and the month before announced it was loaning $500 million to its Wynn Macau branch.
Fitch predicts that more moves like these could occur “if negative cash flow persists.”
Macau’s re-bidding process is currently underway, and while conventional wisdom holds that the government will approve licenses for the six existing concessionaires, the venture is not without risk. Not with Genting Malaysia entering the fray. Analysts and industry executives see this company’s Macau proposal as legitimate and to be taken seriously.
If an existing operator lost its license in Macau, it would likely be subject to immediate credit downgrades, Fitch said. Then there’s the specter of capital that dealers must set aside to comply with Macau’s new gambling laws.
“The possibility of onerous capital commitments also remains a key unknown until the concession bidding process is publicly outlined by the government, which could happen in the short term. We have become less concerned by the risk of potentially lower operating economics given the additional clarity on enacted amendments to the existing gaming law issued by the Macau government,” concludes Fitch.