During the throes of the coronavirus pandemic, casino operators in Macau incurred significant amounts of new debt in order to persevere. Despite this, Morgan Stanley has expressed optimism, predicting that the six licensed operators will succeed in notably reducing their financial obligations over the upcoming years.
Analysts from Morgan Stanley forecast that gaming companies in Macau’s special administrative region (SAR) will manage to make substantial strides in reducing their outstanding debts in the next three years. This could feasibly bring their debt figures back to pre-coronavirus pandemic levels by 2027.
Morgan Stanley’s report mentioned, “The pace of deleveraging could increase from the second half of 2023 as business volumes persistently improve.” They also highlighted that it may take the gambling sector around three years to reach 2019’s net debt levels, assuming an annual free cash flow of $6 billion or approximately $9 billion earnings before interest, taxes, depreciation, and amortization (EBITDA).
The six operators in question are Galaxy Entertainment, Melco Resorts & Entertainment, MGM China, Sands China, SJM Holdings, and Wynn Macau. Each had to closely navigate the challenges presented by prolonged shutdowns and travel restrictions due to the pandemic, which took a toll on Macau’s casino industry.
Being compelled to borrow under such severe circumstances often resulted in lower credit ratings and increased borrowing costs. To put things into perspective, the combined debt of Macau’s casino operators multiplied fivefold from the end of 2019 through to the close of last year.
As the year commenced, the debt of Macau’s casino operators was estimated to be upwards of $20 billion. Regardless, these gambling companies managed to deduct $1.7 billion from this amount in the first half of 2023 alone, which indicates that their debt reduction pace this year could potentially reach $3.4 billion, Morgan Stanley suggests.
However, the bank also cautioned, “Non-gaming commitment is not free and becomes a cash outflow,” estimating the average per year expenditure to be 20% of the anticipated 2024 EBITDA over the next decade.
Furthermore, Morgan Stanley pointed out varying debt scenarios between the different casino operators. SJM Holdings is most leveraged at 9x, while Melco and Wynn Macau’s debt levels lie within the range of 5x to 6x. Measured proportionately to market capitalization, Melco emerges as the highest at 131%. Conversely, SJM, Wynn Macau and other operators have sufficient EBITDA coverage, enabling them to comfortably meet their outstanding financial obligations.
The analysts noted that MGM China and Sands China—the biggest operator in Macau—have leverage rates between 3x to 4x. They also added that MGM China is gradually becoming capable of debt reduction, owing to the addition of 200 table games across its MGM Cotai and MGM Macau establishments. It’s noteworthy that MGM Resorts International owns 56% of this concessionaire.
