On the sidelines of the groundbreaking ceremony of the new MGM Grand Macau casino complex in Macau yesterday (June 1), the 50/50 sponsors, Pansy Ho and Terry Lanni, CEO of MGM Mirage, confirmed that they are speaking to banks to secure a project finance facility. A decision on the arrangers of the facility will be made this month.
In terms of the size of the loan, Ho says they would like as much debt as possible to finance the $975 million complex. "We're hoping that with the strong proposition [of MGM Grand Macau] we can get more than a 50/50 debt:equity split," she says. "MGM Grand Macau carries a strong reputation. We are not like other casinos that are run by new comers who cannot demonstrate their capabilities."
Judging by the number of bankers invited to the ceremony, there is no shortage of potential backers. But all comment that it is difficult to finance casinos. Regulatory issues mean some banks cannot finance casinos, and many global banks do not have lines in place for Macau at all.
Any eventual loan deal will have to offer terms similar to those offered by rival Wynn Macau in its ground breaking financing package last year. That facility secured almost $400 million at 350bp to 382bp over Libor for seven year money.
Key to the discussions will be what model MGM Grand Macau chooses to follow. Ho and Lanni confirm the casino will be going for premium and VIP gamblers. However in Macau's casino market many VIPs are secured by so called VIP Room Operators who are paid a share of the net gaming revenues the casinos make from the VIP gamblers. Under US gaming laws this is illegal, although in Macau it is a very profitable way of securing the high rollers. Lanni says that the company was "studying" the issue while Ho notes that they, "are looking into whether we can do profit sharing with the VIP Room Operators. If we do it, it will be done in compliance with US regulations."
Rival operator The Sands Macau has chosen not to take this route and has gone for the mass market approach. The $260 million it took to build this casino has been paid off within one year and reports suggest that it throws off some $20 million to $30 million a month in profit, such is the huge success it has enjoyed in its first year of operations.
Lanni and Ho also said they were looking into the possibility of listing MGM Grand Macau in Hong Kong, although it would be some way off if it were to happen. "We have always been interested in a Hong Kong listing," Lanni comments. "But only if we were in total agreement with our partners. I'd like to give everyone a stake in what is a very big future for Macau."
Ho takes a rather more circumspect stance on the issue, stating that there was "no immediate need" for a listing. "What's more important is that we get the [debt] financial assistance in place first."
Such a listing could happen once the new complex is up and running some time in the first half of 2007. Lanni notes that MGM Grand Macau is looking to expand into new sites in Macau, especially Taipa island. Having an existing asset throwing off cash would make financing future expansions much easier.
However the rate of increase in the competition of casinos in Macau will clearly concern some bankers. The first mover advantage enjoyed by The Sands Macau is unlikely to last, as more casinos are built and more tables compete for players.
In this there is a certain irony for MGM Grand Macau. It was offered a so-called sub concession by the Macau government this year, bringing the total number of concessionaires to five.
The government had originally said in 2002 that it would only offer three concessions. If more concessions or sub concessions were to be awarded, the value of the concession - main asset backing any credit - would be reduced, hoisting the beneficiary of the previous concession award by their own petard.
Moreover, it is unclear what mechanisms are in place for creditors to take possession and monetize that concession in the event of any bankruptcy. It is understood that Wynn Macau came to an arrangement with the government, but the details of this have never been made public.
Overall, while the big picture for the Macau casino market looks as bright and glitzy as a neon light, the financial realities for the particular operators are different. With multiple new operators exponentially expanding the supply of tables, the announced investments will require billions of dollars in finance.
As in any casino, there are likely to be winners and losers. One just hopes that the music that came on at the end of the groundbreaking ceremony was not prophetic. It was the Bee Gees singing 'Tragedy.'
The June issue of FinanceAsia magazine will feature a full examination of the issues involved in the financing of casinos in Macau and the rest of Asia.
