Macau Casino Operators Can Pare Debt to Pre-Pandemic Levels by 2027

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.

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%.

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.