Macau Casino Operators Can Pare Debt to Pre-Pandemic Levels by 2027
Posted on: September 17, 2023, 10:31h.
Last updated on: September 18, 2023, 03:46h.
Macau casino operators took on massive amounts of fresh debt to stay afloat during the coronavirus pandemic. But Morgan Stanley believes the six concessionaires will make progress on reducing those burdens over the next several years.
The bank expects the gaming companies operating in the special administrative region (SAR) to make a significant dent in outstanding obligations over the next three years, potentially getting debt figures back to pre-COVID-19 levels at some point in 2027.
The pace of deleverage could pick up from 2H23 as business volumes continue to ramp,” noted Morgan Stanley analysts in a recent report. “It could take the industry roughly three years to delever and get back to 2019 net debt levels, based on $6 billion annual FCF (free cash flow),” or around $9 billion in earnings before interest, taxes, depreciation and amortization (EBITDA).”
The six Macau operators are Galaxy Entertainment, Melco Resorts & Entertainment (NASDAQ: MLCO), MGM China, Sands China, SJM Holdings, and Wynn Macau.
Reasons for Optimism on Debt
Owing to a multiyear shutdown, China forbid a return to pre-pandemic travel levels, pinching Macau’s gaming industry in the process.
As a result, gaming companies there borrowed out of necessity, in many cases forcing credit ratings lower and triggering higher borrowing costs. By some estimates, aggregate Macau concessionaire debt surged fivefold from the end of 2019 through the end of last year.
Entering this year, Macau operator debt approached $20 billion. But the gaming companies knocked $1.7 billion off that figure through the first half of 2023, indicating their pace of debt reduction this year could approach $3.4 billion, according to Morgan Stanley.
“Nongaming commitment is not free and is cash outflow,” added the bank. “We estimate the average yearly spend (over 10 years) to be 20% of [estimated] 2024 EBITDA.”
SJM, Melco Could Be Causes for Concern
Each company has different debt dynamics, with Morgan Stanley noting that Grand Lisboa Palace, owned by SJM Holdings, is the most levered at 9x. Melco and Wynn Macau are said to be around 5x to 6x. But as measured by debt as a percentage of market capitalization, Melco is the worst offender at 131%.
SJM and Wynn Macau reside around 101%. But both operators and SJM have ample EBITDA coverage, indicating they can adequately service outstanding obligations. Morgan Stanley estimates that leverage for MGM China and Sands China — the largest Macau operator — is 3x to 4x.
The bank notes that adding 200 table games across MGM Cotai and MGM Macau is paving the way for MGM China to reduce debt. MGM Resorts International (NYSE: MGM) owns 56% of that concessionaire.
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