Will firm buy out its Macau minority owner?
Is James Packer on a losing streak?
That’s the conjecture as Macau, where the Australian casino magnate is heavily invested, continues to bleed revenue. His City of Dreams casino resort in Manila, open since early 2014, also has failed to meet projections.
Packer owns 34 percent of Melco Crown’s $US 3.2 billion Studio City, set to open on Macau’s Cotai Strip this year. The city is in the throes of a historic decline, and has lost almost 38 percent of net revenues year-on-year in the past 12 months.
The Macau government is making it tough for operators by limiting the number of table games they can install in their new resorts. According to GGRAsia, Studio City must have a minimum of 400 gaming tables or risk being technically in default with its lenders for a $US1.4 billion loan. But the first two Cotai resorts to open this year, Galaxy Entertainment’s Phase II and Broadway, were given just 150 tables in properties that had room for 500.
As the market struggles, Melco Crown has amended its senior facilities with a syndicate of banks. Under the new deal, the company will be entitled to a $US1.75 billion ($2.26 billion) facility, with a $US500 million term loan over six years and a $US1 billion revolving credit facility. The company, led by a partnership of Melco International’s Lawrence Ho and Crown Resorts’ James Packer, retained the option of increasing its revolving credit line by $US250 million over five years.
“The company intends to fully draw down the term loan facility on or about June 29, 2015,” Melco Crown Entertainment said in a filing to the Hong Kong Stock Exchange.“The amended facility can be used to refinance the outstanding balance of the original facilities and for general corporate purposes of the company and its subsidiaries.”
As a condition of the amended facility, Packer and Ho must control at least 30 percent of the issued share capital of Melco Crown Entertainment. According to the filing, each partner has 34.29 percent of the firm.
Another Packer investment is also faltering, according to Bloomberg News. As recently as February 2014, Packer called his City of Dreams casino in Manila a “bet on China.” Like many others in the industry, he thought VIP players who no longer play in Macau would flock to other jurisdictions. More than a year later, Bloomberg reported, “the gamble hasn’t paid off.” Philippine casino stocks have taken a hit, and are not expected to rebound any time soon. According to a forecast by JP Morgan Chase, revenues will fall 56 percent across the industry in 2016.
“The chain reaction from Macau hit everyone,” said Noel Reyes, chief investment officer at Security Bank Corp. “Expectations VIP players will come in large numbers didn’t happen. The stocks have fallen quite significantly but not everyone is rushing back in, and there’s no clear light at the end of the tunnel.”
Analysts at Morgan Stanley have reiterated their “underweight” rating for Melco Crown. That follows Nomura’s “reduce” rating issued in May.
Also in Manila, shares of Bloomberry, which operates Solaire, have declined in value by 27 percent so far this year. Resorts World Manila operator Travellers International Hotel Group Inc. has seen a decline of 35 percent. Melco Crown Philippines fell 56 percent. And Chinese tourism in the Philippines declined by one-third in the first quarter of this year.
At G2E in May, Tom Arasi, president and COO of Bloomberry Resorts, said the “challenges” in Macau—which so many thought would be a catalyst for growth in other markets—“don’t help anyone in the industry.”
And Sanford C. Bernstein analyst Vitaly Umansky, noting the arrests of 14 suspected South Korean casino marketers allegedly doing business in Macau, said the action serves as a warning for other jurisdictions.
“We believe the Chinese government’s crackdown also targets local tour agencies that help gamblers apply for a foreign visa,” he said. “We believe the crackdown reflects that the Chinese government will not allow foreign casinos to scout Chinese VIP players on the back of regulatory arbitrage in favor of neighbor countries (including the Philippines and Korea).”
Despite the current declines, the Asia Pacific region continues to build the industry, reported the Macau Business Daily. South Korea has three new casinos in the pipeline, while Australia, New Zealand and Russia are expected to invest in two casinos each within the next five years. The Philippines also plan two more resorts.
Meanwhile, Melco Crown may buy out its minority partners in the Studio City project for about US$1 billion, says a note from the Bernstein brokerage firm. New Cotai LLC, which is associated with U.S.-based investment firms Silver Point Capital and Oaktree Capital Management, owns 40 percent of the project. The Bernstein team said part of the company’s additional liquidity “may be used in relation to the potential acquisition of the 40 percent joint venture partner in Studio City, which we argue could be a near-term catalyst.” The price would be in the US$1 billion range.