Co-leads Merrill Lynch and Morgan Stanley are readying a dual tranche $500 million debut bond deal for Macau-based casino group Galaxy Casino. The extensive roadshow is slated to take off on Wednesday in Singapore (November 23). The deal will be the first overseas bond offering from a Macau-based issuer. Following Singapore, roadshows for the B1/B+ (S&P/Moody's) deal will then travel to Hong Kong on the 24th and 25th before heading overseas. It will be marketed to continental investors on the 28th and UK investors in London on the 29th before heading to the Philadelphia and New Jersey for the 30th. The deal will wrap up its East coast tour in New York on December 1 and Boston on the 2nd. West Coast and Midwest showcases will be held on the 5th and 6th, respectively. Pricing is expected in the second week of December.
The deal will include a seven-year no call four-year fixed rate tranche and a five-year no call three-year FRN. As yet respective size and price guidance have not been established. As a greenfield build-up, proceeds will be used to fund the construction of Galaxy's StarWorld Hotel and Cotai Mega Resort developments in Macau. The StarWorld Hotel is schedule to be completed in August, while the Cotai Mega project is set to open in 2008. Observers seem to be split the debut issue. Recent bank deals for Wynn and other casinos have been massively oversubscribed and some believe that current market sentiment toward casino risk is favourable and will give this deal a positive bid tone to tap into. the other hand there is concern over the deals greenfield arrangement. "There is a certain level of concern because the resorts haven't been built yet," says one market professional. "Once you have it built you are one or two years into the deal, in other words, you are going to be one year or a half year away from the short tranche potentially being called. If it isn't built then the deal will still be out there, and effectively you are taking on some project finance risk for physically building the resorts." Additionally, some feel that a $500 million high-yield issue might be a little too weighty for the current market. "The fixed and floating rate structure tells me this is a US-focused deal and you can understand that; it is a casino and US investors has been buying up casino's recently," says one observer. "Ultimately they will need that US bid, unfortunately the US market, especially in the high-yield new issuance space, hasn't been on fire recently."
According to Standard & Poor's rating report, "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 adds: "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 notes will be issued via wholly owned subsidiary Galaxy Entertainment Finance, and will be guaranteed by Galaxy Casino. Galaxy is owned by Hong Kong Listed K. Wah Construction Materials.
