Macau Casino Companies Can Reduce Debt to Pre-Pandemic Figures by 2027
Casino businesses in Macau took on significant loans during the coronavirus pandemic to stay afloat. However, analysts at Morgan Stanley predict these companies will gradually lower their debts over the next few years.
Morgan Stanley anticipates that Macau's gaming operators will make substantial progress in reducing their debts over the next three years, potentially returning to pre-pandemic levels by 2027. The rate of debt reduction may accelerate from the second half of 2023 as business volumes improve. The bank estimates it would take about three years for the industry to deleverage and reach the 2019 net debt levels based on an annual free cash flow of $6 billion or approximately $9 billion in earnings before interest, taxes, depreciation, and amortization.
Six casino operators in Macau include Galaxy Entertainment, Melco Resorts & Entertainment (NASDAQ: MLCO), MGM China, Sands China, SJM Holdings, and Wynn Macau.
Reasons for Encouragement towards Reducing Debt
The prolonged shutdown imposed by China prevented a return to pre-pandemic travel levels, adversely impacting Macau's gaming industry. As a consequence, gaming companies in Macau borrowed heavily to keep their businesses running, which often led to a downgrade in their credit ratings and higher borrowing costs. It's estimated that combined Macau concessionaire debt increased fivefold from the end of 2019 until the end of last year.
The total debt for Macau operators amounted to $20 billion as of this year. Between the first and second halves of 2023, companies managed to reduce this burden by $1.7 billion, indicating they could eliminate $3.4 billion worth of debt this year.
"Nongaming commitment isn't free and involves cash outflow," the bank added. They estimate that an average of 20% of the earnings before interest, taxes, depreciation, and amortization (EBITDA) is spent annually on non-gaming commitments for a decade.
Potential Areas of Concern
Each company has varying debt profiles, with Morgan Stanley stating that Grand Lisboa Palace, owned by SJM Holdings, has the highest level of leverage at 9x. Melco and Wynn Macau are estimated to be around 5x to 6x. However, when measured by debt as a percentage of market capitalization, Melco appears to have the worst situation at 131%.
Both SJM and Wynn Macau have enough EBITDA coverage to comfortably service their existing debts. The bank estimates that the leverage of MGM China and Sands China stands between 3x and 4x.
Morgan Stanley observes that adding 200 table games to MGM Cotai and MGM Macau is helping MGM China manage its debt. MGM Resorts International (NYSE: MGM), which holds 56% ownership of the concessionaire, benefits from this move.
