Co-leads Merrill Lynch and Morgan Stanley have priced Macau's first ever global corporate bond offering with an upsized $600 million dual tranche offering for Galaxy Casino. The deal also represents Asia's second largest high-yield corporate offering behind Noble's $700 million offering in March.
The deal consists of a $350 million seven-year non-call four year fixed rate tranche and a shorter tenured $250 million five-year non-call three-year FRN.
The $350 million fixed rate tranche was priced at par on a coupon of 9.875% to yield at 9.875%. The $250 million FRN was also priced at par on a coupon of 500bp over six-month dollar Libor. Fees were undisclosed, but are thought to have been around 2%.
During an exhaustive roadshow schedule that lasted two weeks and touched down in 10 cities in Asia, Europe and the US, the fixed rate tranche was marketed to investors won an initial indicative yield of 10%, but this was subsequently revised down to the 9.875% to 10% range. The FRN priced flat to its range of 500bp over.
The B1/B+ rated deal amassed a huge order book of $3.4 billion, equating to an oversubscription ration of nearly seven times. The order book was split $2.4 billion on the fixed rate and $1 billion on the FRN, with 200 accounts taking part in total.
Geographically, the deal was, as expected, sold heavily into the States with US investors accounting for 70% and 65% of the fixed and floating rate notes respectively. Asian investors bought 23% and 27%, with Europe accounting for 7% and 8%.
Despite recent failures in the high-yield debt space, Galaxy was able to take advantage of strong appetite for casino risk particularly among US invstors. Recent bank deals for Wynn and other US-based casinos have been massively oversubscribed and are said to have performed strongly in secondary trading. Neverthelss, investors still needed to be bought up to speed on Macau and Galaxy's credit risk profile.
According to Standard & Poor's rating report, the agency said, "The two new major projects, StarWorld and Galaxy Cotai Mega Resort, have execution risks. In addition, Macau is exposed to the economic volatility and policy risks of China. These risks are partly offset by Galaxy's position as one of three casino concessionaires in Macau, the company's strategically located assets, and the industry's high entry barriers. Galaxy's existing casino, Waldo, has already proven successful in a city with a robust gaming industry."
The report added, "Galaxy's financial profile is likely to be aggressive over the next few years, with a highly leveraged capital structure. While Galaxy's existing operation is generating strong cash flows, the company's cash outlays will be high due to heavy capital expenditure estimated at more than HK$7 billion between 2005 and 2008, and free cash flow generation is expected to be negative through 2007.
"The company's expected ratio of total debt to capital will average about 75% over the next few years, while its ratio of funds from operations to total debt is likely to be 15%-20%. The company's financial profile is expected to strengthen significantly once StarWorld and Galaxy Cotai Mega Resort are operational."
The StarWorld Hotel is schedule to be completed in August, while the Cotai Mega project is set to open in 2008.
The notes are offered via wholly owned subsidiary Galaxy Entertainment Finance, and will be guaranteed by Galaxy Casino. Galaxy, holder of one of the three available gaming licenses in Macau, is owned by Hong Kong Listed K. Wah Construction Materials.
