Inside Asian Gaming

INSIDE ASIAN GAMING | August 2010 40 Feature A possible side effect of the inter-bank lending crisis and its depressive effect on bank deposit interest rates may have been to channel cash to Macau junkets. Secret Macau, a new 80-page report by the consumer and gaming research team at CLSA, an independent brokerage and investment group, covers all aspects of Macau’s casino gaming business. One development reported by CLSA following its research is that Macau junkets are willing in some cases to pay private investors up to 3% interest per month on injections of working capital equal to HK$5 million (US$640,000) or more. “Friends/shareholders of junket companies may channel private funds into their working capital through lending (for a certain fee) or gambling these amounts as chips,” says the CLSA report. “Investing in junkets is also possible in Macau. What we hear from sources on the ground is a minimum of HK$5 million is accepted for interest payments of 1.5% to 3% per month. This is higher than keeping money in banks or even some mutual funds,” adds the CLSA research paper by analyst Huei Suen Ng, Regional Head of Consumer and Gaming Research Aaron Fischer and research associate Mariana Kou. Macau junket capitalisation is thought of typically by people inside and outside the local casino industry as a specialist field. It’s not generally seen as a mainstream investment opportunity for recognised financial institutions. CLSA points out, however, there is a precedent for using mainstream capital markets to raise junket working cash. Several companies with interests in Macau junket operations have listed in Hong Kong in order to raise junket capital. Given the current volatility of equity markets, though, share issuance is a less attractive way to capitalise junkets than it was in the bull market of 2007. But the shrinkage of bank retail interest rates linked to a corresponding fall in inter-bank lending rates that happened as a response to counter party risk since September 2008 may be creating opportunities for private investment in junkets. Parking your money in a junket for a month here or there, with none of the punitively high charges for early withdrawal or punitively low interest rates associated with short term bank deposits, must seem like an attractive option for those local entrepreneurs with a sophisticated understanding of the junket system. As an illustration, in the first week of August, the Hong Kong Interbank Offered Rate for one month was 0.23000%. During that week, time deposit rates for Hang Seng customers on deposits of HK$1 million and above stood at 0.0100%. The junkets can afford to pay significantly more interest to capital providers because of the spread created by borrowing on monthly terms and lending out to VIPs who then repay on 10- day terms, according to CLSA. “Casinos extend credit (marked chips) to junkets to be settled within a month. Given the improving economy, these amounts Lending a Hand Some investors find Macau junkets an attractive alternative to parking their money in a bank, says CLSA Asia-Pacific