Macau’s gross gaming revenues are expected to fall to near-zero for the foreseeable future in the wake of a growing COVID-19 outbreak, creating liquidity concerns and potentially a need for additional funding.
After health authorities announced 12 confirmed cases of COVID early on Sunday morning, which grew to 31 cases by late Sunday, gaming analysts observed overnight that the impact on the city’s already struggling casino industry would be substantial with GGR expected to fall to almost zero.
“Casinos remain operational for now, but we wouldn’t be surprised to see revenues going to near-zero levels for at least [a] few weeks until the situation will be under control, with minimal (if any) inbound visitation,” said JP Morgan’s DS Kim and Livy Lyu.
“Naturally, we expect the market’s focus shifting to cash-burn and liquidity situation under the worst-case scenario.”
Bernstein analysts Vitaly Umansky, Louis Li and Shirley Yang added, “While Macau’s Secretary of Finance has said that the casinos will not be shut down, visitation into the city will be severely limited (perhaps being almost completely blocked) and revenues are set to plummet close to zero for at least the next week, and quite likely several weeks.
“GGR will be severely impacted in both June and July.”
With no revenues to speak of, liquidity will become an even greater concern than it already was – particularly given the news only last week that all operators must have MOP$5 billion (US$625 million) in net assets set aside within their Macau-based concessionaire entities on a permanent basis if they are to win (and subsequently retain) a concession when the re-tender process launches later this year.
Even more burdensome, it appears that the effect of the new Macau gaming law is to require the concessionaires to maintain a balance of MOP$5 billion in cash within those concession-holding entities while the tender process plays out and prior to the commencement of operations under the new concession, if granted. It appears that cash must be held separately from other non-cash net assets, and separately from any cash held by the listed entities of the concessionaires.
“Under this harsh stress test,” said JP Morgan, “SJM and Sands have the shortest liquidity runway of nine months until March 2023, while other operators such as Wynn, MGM and Melco have 1.5-2 years of liquidity – enough liquidity to weather through zero revenues until mid-2024. Galaxy still has substantial liquidity of 60 months even under the zero revenue environment.”
Bernstein noted that, while operators have sufficient liquidly to weather the storm over the short and medium term, some operators may require capital injections either from capital markets or controlling shareholders.
In particular, the brokerage said that SJM is “likely to have a minimum net asset – and potentially cash balance problem – in 2023,” having been in the most precarious liquidity position prior to securing a new credit facility recently.
However, Sands China has a financially sound parent in Las Vegas Sands to lean on if and when required while other operators have already secured necessary support.
“The new outbreak, coming on the heels of a softer GGR environment since early this year due to travel restrictions following outbreaks in China, will add pressure on operators’ liquidity … [but] all operators should have access to ample liquidity to weather the storm,” Bernstein said.