Macau Casino Debt Lures Bond Investors

Macau casino debt attracts bond investors

Bond investors in Asia and the rest of the world are increasingly turning to the bonds of Macau casino operators as China and the rest of the world turn their attention away from China's troubled property market.

Most Macau gaming companies are rated junk, meaning market participants take on more credit risk on the bonds but receive higher returns than are typical for investment-grade corporate bonds. The six Macau franchisees are Galaxy Entertainment, Melco Crown Entertainment (Nasdaq: MLCO), MGM China, Sands China, SJM Holdings and Wynn Macau. A recovery in Special Administrative Region (SAR) gross gaming revenue (GGR) paves the way for upside potential in debt issued by casino companies.

With the economic recovery on track, Macau is in a better position," Hong Kong-based asset manager Value Partners said in a recent report.

Investors' trust in Macau casino bonds is paying off. For example, Sands China and its parent company, Las Vegas Sands Corp. (NYSE: LVS), were upgraded to investment grade by Standard & Poor's (S&P) in July.

Macau casino bonds may be more attractive than stocks

Enthusiasm for the bonds issued by the Macau concessionaire is high, while its share price is mired. Except for MGM China, the stock prices of other Macau operators have recently hit new lows in 2023.

JPMorgan analysts recently argued that the treatment of Macau stocks was too harsh, with operators' combined market capitalization at levels seen in 2022, when Macau first opened to trading. The bank added that some operators are generating enough free cash flow (FCF) to cover the debt obligations they took on to stay afloat at the start of the COVID-19 pandemic.

This point about free cash flow is critical because it allows franchisees to reduce leverage, potentially allowing the company to experience credit improvement.

There are other signs that bonds sold by Macau casino operators could generate returns for investors. To cite just one example, Moody's Investors Service last week raised Melco's credit rating outlook to stable from negative.

Other Points in Support of Macau Casino Bonds

Debt sales by Macau gaming companies could provide a further boost. This includes relatively low default rates in the Asian high-yield bond market (excluding Chinese real estate debt).

Second, as some Chinese real estate companies have now exited the bond market, supply has declined, which may prompt investors to take another look at Macau chartered companies' commercial paper.

"Chinese real estate companies account for a large share of Asia's high-yield bond market, but some of them have defaulted since 2021, including China Evergrande Group and Country Garden Holdings," Taiichiro Sunaga for Nikkei Asia Report. "In addition, new debt issuance has dropped significantly. Currently, high-yield bonds issued by Indian and Hong Kong companies are also seeing larger trading volumes. The second most popular bond attracting investor funds is Macau casino bonds."