Inside Asian Gaming

INSIDE ASIAN GAMING | July 2009 28 In Focus be laying golden ones tomorrow. Past experience in other industries has shown that danger can sometimes lurk in syndicated loans. With those instruments, small lenders in the syndicate—often in more urgent need of liquidity than their bigger brothers—have on occasion dug in their heels and refused to reschedule the terms of a loan, thus bringing efforts to restructure a company’s debt crashing down. In the 1980s, Rupert Murdoch’s News Corporation, now one of the world’s largest media conglomerates, was leaking cash because of the massive start-up costs of its satellite TV services, involving payments to Hollywood studios for films and to sports bodies for live coverage rights. The business came within hours of going under because one small lender on a syndicated loan to the company initially declined to reschedule. That kind of risk must surely have been magnified in the global casino industry by the inter-bank lending crisis. In the Asian segment of the industry, many of the overseas-based operators were alreadypushing theenvelopeof theWestern- style leveragingmodel even before the crisis. The credit freeze and the accompanying squeeze on liquidity and credit for Mainland China’s businessmen—many of them big gamblers in Macau’s overwhelmingly VIP- centric baccarat market—made a risky situation positively perilous. Going local Part of the answer in improving casino operators’ balance sheets may be to set up local units capitalised locally. This would take advantage of the structural benefits of the East Asian regional economy—namely lower levels of personal and corporate indebtedness as compared to the West. Before the global credit crisis escalated last autumn, Wynn Macau was touted for a potential US$2 billion-plus initial public offering (IPO) in Hong Kong. Wynn’s local unit arguably would present the lowest risk, if not the cheapest entry price. As the least financially stressed of the three US-based operators currently in Macau, Wynn would be best placed to charge a premium for its stock. On the upside, it is likely to reward investors with steady growth rather than roller coaster volatility. LVS remains under pressure on its debt schedule. But the stock of the LVS parent is now showing very healthy quarter on quarter improvements in its price from a low point at the end of last year, although some day-to-day and week-to- week volatility persists. By mid-June, LVS’s stock had spiked at a level more than sevenfold that achieved in March. Macau accounted for 65% of LVS’s global earnings before interest, taxation, depreciation and amortisation (and rental) in the first quarter of 2009, according to Dow Jones. IPO season Overall these factors should make LVS another good candidate for a local IPO. An LVS offering in Hong Kong could raise up to US$1.1 billion, according to Merrill Lynch. Reuters reported recently that Goldman Sachs has been hired by LVS to prepare plans for such a move. In the absence of a general and sustained rally in equity markets regionally and globally there would, however, arguably be some question marks in the short term regarding potential volatility of any local LVS stock. As with good comedy, the secret of any successful flotation is timing—and luck in finding a receptive audience. The Hang Seng Index has risen 62% since March—a net gain of 41% on the low experienced in the first quarter of 2009. But most analysts appear to think that even in East Asia the equitymarkets are somewayoff a sustained rally. That then raises the question of how companies price any offerings. They will need to be at a rate sufficiently attractive to demonstrate inherent value for short- term capital growth—not an easy task when appealing to currently risk averse investors. At the same time the pricing must not be so attractive that it leads capital to migrate from the parent unit in Las Vegas. Any local IPOs will also need to be priced high enough to avoid saddling the new units with under capitalised balance sheets. That would risk reprising the leveraging issues exposed by the credit crisis. “What I think is driving the speculation at this moment is the financial distress that a lot of the parent organisations standing behind some of the assets in this market are facing,” Adam Rosenberg, Managing Director, Global Head of Gaming Group for Goldman Sachs & Co., told a conference session at G2E Asia 2009. “As they’ve said, they’re considering all alternatives to deal with their operational and financial situations,” added Mr Rosenberg. “The capital markets are presenting an opportunity,” added Andrew Zarnett, Managing Director at Deutsche Bank Securities, during the same session. “It’s temporarily open, which means there’s something to be done,” stated Mr Zarnett. Recovery ahead? The Hang Seng in 2007 East Asia—not loaded down with debt