CASINO

Crown detainment highlights Chinese VIP biz risk, says Fitch

TAGs: crown resorts, Fitch Rating Service, Leonard Postrado

Chinese VIP business remains to be a risky venture for global operators as high roller gambling by Chinese nationals outside of China continues to be on the top of mind for Chinese authorities.

Crown detainment highlights Chinese VIP biz risk, says FitchThis was the assessment made by international credit debt watcher Fitch Ratings in light of the detainment of 18 employees of Crown Resorts in China.

Fitch believes that the risks related to the more recent detainment (namely reduced VIP volume) will affect the Asia-Pacific casinos more than casino operators in Macau.

It explained that VIP in Macau represents less than 20 percent and 10 percent for Fitch rated MGM China and Sands China, respectively.

The story, however, is different when it comes to Fitch-rated casino operators outside Macau with significant Chinese VIP business. The credit debt watcher believes that Genting Singapore and Manila Bay Sands will be able to wade the current developments in Chinese VIP business with ease.

“Genting Singapore and Manila Bay Sands have solid stand-alone financial profiles, strong market positions in duopoly Singapore market and, in Fitch’s opinion, implicit support from financially healthy parent companies,” Fitch analyst Alex Bumazhny said in a note.

Bumazhny said Crown and Imperial Pacific are the two casinos at risk from the stringent measures being implemented by the Chinese government against high roller gambling although “their IDRs have factored in the risk related to the companies’ respective VIP business, which tends to be opaque.”

Crown’s VIP represents 28 percent of hold normalized revenues at the company’s Australian assets in the second half of 2015. Crown’s VIP earnings before interest, taxes, depreciation and amortization (EBITDA) contribution is notably lower because of VIP’s lower margin.

The Fitch analyst noted that Crown’s US$2 billion project in Sydney is focused on VIP gaming. He, however, did not include EBITDA or cash flow from Crown Sydney in its forecasts.

“Moreover, Crown’s Melbourne and Perth properties are largely underpinned by cash flows from stable locals mass market where they hold the sole license in the respective regions,” the analyst explained. ”Thus ,while Crown could see volatility in its VIP program play over the next 24 months, the strength of its locals mass markets continues to support its financial profile.”

On the other hand, Imperial Pacific’s business model is Chinese VIP focused and a tightened operating environment in China could potentially have serious credit implications.

Recession drives gaming, lodging, and restaurant bankruptcies

In another analysis, Fitch said that weak consumer spending has sent troubled gaming, lodging and restaurant companies down the road of bankruptcy.

Fitch has come down to this conclusion after conducting a study on at least 25 cases of bankruptcies.

Sharon Bonelli, Senior Director, Leveraged Fitch, noted that of 13 of these incidents happened during the 2008-2010 recession – period when consumer discretionary spending slid along with the residential real estate market downturn and corporate travel and entertainment budgets were slashed.

“Weak consumer or business spending, rising costs, excess capacity and changing consumer preferences present challenges to the gaming, lodging and restaurant sectors,” Bonelli said.

In the gaming sector, Fitch pointed out that intense regional competition, and in the case of Trump, Carl Icahn’s inability to strike a deal with Taj Mahal’s union workers, led to the closures of the respective resorts.

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