Macau Recovery: Long Road Ahead with Plenty of Debt

The story of Macau’s recovery from the coronavirus pandemic is ongoing and taking far longer than gaming companies and investors were hoping. It’s also clear that road will be laden with debt.

Amid lingering COVID-19 protocols that are keeping visitors away from the casino hub and hammering gross gaming revenue (GGR), there is sliding. Analysts expect it will be years before it resembles pre-pandemic levels. In a recent report, Fitch Ratings forecast 2022 through 2024 Macau GGR coming in at 27%, 50%, and 70% of 2019 rates, respectively.

Macau’s COVID testing/quarantine policies have changed frequently during the past few years. Gaming recovery could be delayed with the reinstatement of tighter restrictions with higher infection rates,” noted the research firm. “Slower China economic growth could also negatively affect the gaming recovery, including for the valuable premium mass and higher-end players.”

China’s zero COVID policy is pressuring the balance sheets of Macau concessionaires. Morgan Stanley estimates that in the third quarter, limited operating capacity caused gaming companies to burn $1.5 billion in cash, up from $1.4 billion in the prior quarter.

Macau Capital Conundrum

With concessionaires taking on debt simply to stay afloat while waiting for a return to normal, Morgan Stanley estimates the combined debt burden of Macau operators is $24 billion, or a nearly fivefold increase from the start of the coronavirus crisis.

As such, access to capital markets is increasingly difficult, particularly for Hong Kong-listed concessionaires.

“Capital access for the operators’ Hong Kong-listed subsidiaries, which are the primary debt issuers associated with Macau operations, is likely to remain limited until GGR recovers to levels closer to 2019 and the regulatory overhang from the gaming concessions subsides,” add Fitch. “Refinancing needs are modest until 2024 when some subsidiaries will start facing debt maturities, when concession renewal event risk will no longer be a concern.”

Fitch forecasts that more moves like those could occur “should negative cash flows endure.”

Renewal Risk

Macau’s retendering process is currently ongoing, and while conventional wisdom holds that the government will approve licenses for the six existing concessionaires, the undertaking is not without risk. Not with the entry of Genting Malaysia into the fray. Analysts and industry executives see that company’s Macau proposal as legitimate and one to be taken seriously.

Should an existing operator lose its Macau license, it’d likely be subject to immediate credit downgrades, said Fitch. Then there’s the specter of the capital concessionaires must set aside to comply with Macau’s new gaming laws.

“The possibility of onerous capital commitments also remains a key unknown until the concession tender process is publicly outlined by the government, which could occur in the near term. We have grown less concerned over the risk of potentially weaker operating economics given incremental clarity on enacted changes to the existing gaming law published by the Macau government,” concludes Fitch.