Inside Asian Gaming

Oct 2007 | INSIDE ASIAN GAMING 5 T he success of Las Vegas Sands Corp (LVS) in mitigating casino resort building costs by selling off real es- tate assets has made other operators sit up and take notice. Deutsche Bank estimates that thanks to monetisation LVS will in effect have made a billion dollars profit on the estimated US$16 billion it is spending on real estate in North America and Asia. This number and the rising cost of tradi- tional debt financing in the wake of the US sub-prime mortgage difficulties has concen- trated minds and encouraged all resort de- velopers to explore ways of leveraging their assets to service or even clear debts incurred from capital intensive construction work. This option is particularly attractive for com- panies planning a second or even a third re- sort in the Macau market. Consultants report a steady queue of companies seeking advice on how to release liquidity from their newly built or soon to be built Macau assets or from their existing Las Vegas ones. One option is the monetisation route ad- opted by LVS for its shopping malls in Las Ve- gas and for the Grande Canal Shoppes at The Venetian Macao. Another is for US operators to utilise strong cash flows from their Ameri- can operations to leverage their project finance with their traditional banking part- ners. It may even be possible to do this on a stream-by-stream basis, taking advantage of individual companies’ operational strengths. A third option may be to strike deals with private equity (PE) companies to sell stakes in future earnings. These sources of capital should not though be seen as an alternative to debt fi- nancing, suggests Ashley Wilkins, Managing Director and Head of Real Estate, Gaming & Lodging Finance for Societe Generale, one of the principals in the syndicated loan for Wynn Macau. He says: “if you take revenue streams as an example, can you get cheaper capital that way? Probably not. It’s going to need the market to develop more before that actually occurs.Why do it if it’s not going to cheapen the capital on the overall project?” Another potential PE route, as the Macau market matures and pressure grows to con- solidate capacity, may be to sell off older or less profitable casinos to private equity firms either for restructuring of the business or for re-use. Colony Capital has already done this in the US, buying a number of casinos including four owned by Harrah’s Entertain- ment and Caesar’s Entertainment in a 2004 deal worth US$1.24 billion. Los Angeles- based Colony—founded by a former mem- ber of Ronald Reagan’s administration—also has a gaming licence in the US, says Adam Rosenberg, Managing Director and Co-Head of the Gaming Group for Goldman Sachs. As a result Colony is a mixture of financier and casino operator, though such an arrange- ment is not possible under Macau’s current gaming licence laws. Creative alternatives on the rise Creative alternatives to debt finance are nevertheless likely to be seen more and more. Traditional project loans tend to have covenants that tie operators into using the cash in specific ways. Bankers naturally pre- fer to protect their capital with terms and conditions until a project is proven. PE-type and other capital financing aremore focused on market opportunity and quick returns, al- lowing operators to allocate capital rapidly in response to shifting market conditions. Jay Schall, Vice President and Associate General Counsel for Wynn Resorts pointed out on a recent visit to Macau that finance flexibility is particularly important in a fast- moving industry led by dynamic individuals trying to out-think the opposition. He says: “In my personal opinion you’re going to see all the available financing tech- niques in the gaming space and the other real estate-based spaces here and around the world eventually. We have a little short- term hiccup here with the US overhang on credit, but you will see a lot of innova- tive techniques here but ‘tweaked’ for the Macau market.” Clear exits favoured The expansion of capital provision in gaming beyond the traditional debt route is, in part, a by-product of the globalisation of the industry and the growing profession- alism of its leadership. As capital markets’ knowledge of gaming has increased, so has the willingness to engage with operators on longer-term projects. One thing all capi- Cover Story Capital Ideas The race is on to leverage Macau’s growing asset base