Macau Casino Operators Shift Focus Towards Reducing Debt

Posted on: September 17, 2023, 10:31h.

Last updated on: September 17, 2023, 10:31h.

Macau casino operators took on substantial amounts of new debt to survive the challenges brought by the pandemic, but analysts at Morgan Stanley believe that these companies will make significant progress in reducing their debt burdens over the next few years.

Macau debt
Sands China’s Venetian Macau. Macau casino operators can reduce debt markedly over the next several years. (Image: Wall Street Journal)

The bank predicts that the gaming companies in the Macau region will make significant progress in reducing their debt over the next three years, potentially returning to pre-COVID-19 levels by 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 Macau Casino Operator Debt

Due to a prolonged shutdown and restricted travel levels, the gaming industry in Macau struggled.

As a result, the gaming companies in Macau had to borrow significantly, which lowered their credit ratings and increased borrowing costs. Macau concessionaire debt is estimated to have increased fivefold from the end of 2019 to the end of last year.

As of this year, Macau operator debt amounted to at least $20 billion, but the gaming companies managed to reduce this figure by $1.7 billion in the first half of 2023, suggesting that their pace of debt reduction for this year could reach $3.4 billion, according to Morgan Stanley.

“Non-gaming 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 SJM Holdings’ Grand Lisboa Palace being the most leveraged at 9x. Melco and Wynn Macau have leverage ratios of around 5x to 6x, but Melco has the highest debt as a percentage of market capitalization at 131%.

SJM and Wynn Macau have leverage ratios around 101%, but all three operators have sufficient EBITDA coverage to fulfill their outstanding obligations. According to Morgan Stanley, MGM China and Sands China, the largest Macau operator, have leverage ratios of 3x to 4x.

The bank points out that the addition of 200 table games across MGM Cotai and MGM Macau is paving the way for MGM China to reduce its debt. MGM Resorts International (NYSE: MGM) owns 56% of that concessionaire.

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