The day of reckoning for casino licensees in Macau is fast approaching. The regulatory and business landscapes are changing as quickly.
Macau is no longer the most profitable and busiest gaming market in the world. It is also not the most popular gaming topic for most Americans. In fact, most people outside of Asia find it worse than boring. But for three American gaming giants, Macau is the center of their financial universe. The Sands, Wynn, and MGM have billions invested in Macau and it is possible they could lose their licenses. It isn’t likely, but it is possible.
This year has been fraught with anxiety for those three, as well as Galaxy, Melco, and SMJ, which also have properties in Macau. The existing licenses were set to expire in 2022 and each operator had to reapply. The anxiety was caused by the lack of clarity. No one knew what the process would be, nor did they know what criteria would be used to judge license applications. One thing was clear: A more universal tourism product would be important. Even before license renewal became a front-burner topic, the companies had invested billions of dollars in their resorts. In the last four years under pressure from city officials and the central Chinese government to diversify, the casinos invested billions more.
From a return-on-investment perspective, the timing could not have been worse. Since its peak in 2014, Macau gaming revenue has been under pressure. The primary pressure has come from China and President Xi Jinping. After becoming president, Xi initiated a campaign to clean up corruption within the government, business, and the Chinese Communist Party. As arrests mounted, it became obvious that corrupt officials had been going to Macau and gambling. In 2014, Macau’s gross gaming revenue reached $44 billion; in 2021, that number dropped as low as $10.8 billion.
China has continued to crack down, but switched the target. Now Xi wants to control all Chinese gamblers and allow only those deemed suitable to go Macau. China is also trying to prevent Chinese gamblers from going to other gaming destinations. If all of that wasn’t enough to prematurely age casino operators and investors, China is still in semi-lockdown from COVID; travel to Macau by Chinese citizens has been restricted since February 2020. There is speculation that China may keep its zero-tolerance policy for two more years. It is said that China is now using COVID restrictions as a political and economic tool. Not good news for casinos trying to service the debt on their investments.
Finally in mid-summer, Macau announced a tender process. Each operator had to pay $5 million for a license extension that is good through the end of 2022. All were required to submit a bid detailing plans for investment and compliance with the city’s objectives. Bidding closed on September 14. Seven companies applied, the six existing operators and Genting, an international casino operator with casinos in England, New York, Las Vegas, Singapore, and Malaysia. The last bid caught everyone off guard. Given that the government of Macau had said only six licenses would be awarded, with seven bidders, someone goes home disappointed.
To say the issue had become very confusing is an understatement. It went downhill from there when the international investment banking firm, Credit Suisse, discovered a new twist in the tale. In what Credit Suisse termed a “channel check,” the firm was told that Macau had raised the bar yet again. Regulatory officials asked for new investment proposals. Nothing that had been done before or was a continuation of previous investments was sufficient to count toward a new license. In addition, the new proposals should be expensive and exclusively non-gaming. According to Credit Suisse, the government also wants a detailed schedule for the investments. Simply saying, “We will build…” is not enough. The committee wants to know how much will be spent and when exactly. The companies also have to demonstrate an ability to perform.
Of the existing operators, SMJ has the weakest balance statement and may not meet the performance requirement under the new standards. SMJ opened its latest billion-dollar resort in Macau just last year, but by the criteria recently revealed, it must propose a new development. As of June 2022, the company had $300 million in cash, maybe not enough to make through the end of the year, especially considering the company lost $354 million in the first half of 2022 and is carrying more than $2 billion in debt.
Indeed, according to Morgan Stanley, meeting the new standards will be difficult for all the operators. Morgan Stanley says the combined debt of the six operators will be $24 billion by the end of the year, up from $5 billion in 2020. Morgan Stanley says the casinos are currently burning through $1.5 billion in cash per quarter.
The Sands has another issue. A letter recently sent to the licensing committee claims the Sands will be unable to perform if it loses a case currently under review by an appeals court.
Another trial underway in Macau could further muddy the waters. Twenty individuals and Alvin Chau, the former CEO of junket-company Suncity, are accused of illegal gambling, money laundering, criminal association, and fraud. Suncity and all the junketers operated under the license of one of the casino licenses. It is not impossible that during the license-review process, at least one of the casinos could be accused of the same crimes and therefore be unsuitable for a license. That might be the story behind Genting’s surprise bid. When Genting first submitted, observers speculated that the Malaysian-based company might be the backup for SMJ, which made sense at the time. But it could be that Macau anticipated denying one of licenses and needed a fallback position.
Of course, this is all wild speculation and based on no hard facts or knowledge. But the day of reckoning is speeding toward the casinos in Macau and it does not look favorable for the operators. Macau has promised to reveal its decisions by the end of the year. The next 70-plus days are likely be filled with anxiety for operators, debtholders, and stockholders.
