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Macau dealers can survive mounting debt, says Morgan Stanley

Posted: May 25, 2022, 9:07 a.m.

Last update: May 25, 2022, 9:09 a.m.

Macau dealer stocks remain bad news/good news and Morgan Stanley’s updated group debt burden forecast bears this out.

Macau dealers
The Cotai Strip in Macau. The debt burden for operators may increase, but most will survive. (Picture: Bloomberg)

The bad news is that the investment bank sees the combined debt of Macau’s six casino operators potentially ballooning to $25 billion by the end of this year, up from a previous forecast of $23 billion released a while ago. only two months. That figure could rise to $27 billion if travel restrictions remain in place through the second half of 2022. The good news is that Morgan Stanley expects all six to survive.

While $27 billion – for now, Morgan Stanley’s worst-case scenario – spread across six companies may not be alarming to some investors, it greatly exceeds the current market capitalization of Las Vegas Sands (NYSE:LVS) of 23, $53 billion. Sands is Macau’s largest operator.

LVS is among the strongest financially and has access to additional cash if needed. Another positive specific to this company is Morgan Stanley, pointing out that Genting Singapore has a strong cash position compared to rivals in Macau and Bloomberry Resorts in the Philippines. This is relevant for LVS because beyond its five integrated resorts in Macau, its only other location is Marina Bay Sands in Singapore.

Other bright spots

In March, Morgan Stanley noted that Galaxy Entertainment was the only one of six Macau dealerships currently positive on a free cash flow to equity (FCFE) basis.

In its latest update, the bank says the need to borrow additional short-term capital is diminishing for Galaxy and Wynn Macau, each with enough cash to survive at least three years at current consumption rates.

It’s a welcome sign for investors in Wynn Resorts Inc (NASDAQ:WYNN), as the stock slumps almost entirely on weakness in Macau as the operator has clear momentum at its Las Vegas locations and from Boston.

Recently, some Wynn executives and board members, led by CEO Craig Billings, opted to take reduced cash pay for the remainder of 2022 in exchange for equity, signaling confidence in the stock.

SJM remains the primary concern

Among Macau’s six dealerships, analysts universally rate SJM Holdings as the biggest concern from a liquidity perspective.

Previous estimates indicated the Greater Lisboa operator could only survive a few months, but if creditors approve a $726 million refinancing plan, it could add 20 months to SJM’s lifespan, according to Morgan Stanley.

In addition to still-restricted travel to Macau, SJM is further hampered by the closure of several satellite casinos. Additionally, Fitch Ratings recently downgraded its credit rating on SJM to “BB” from “BB+”, which means that if the gaming company chooses to issue debt to shore up its cash position, it will have to pay higher interest rates to investors.

Based on first-quarter burn rates, Morgan Stanley expects that, with the exception of SJM, Macau dealers each have the resources to survive at least two years.