David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

(Updated )

All of a sudden, the world's best casino credit is looking a bit short of cash.

Crown Resorts Ltd., the only gambling company judged investment grade by all three major ratings companies , is selling about half its 27.4 percent holding in Macau's Melco Crown Entertainment Ltd. to raise A$1.6 billion ($1.2 billion) in cash, canceling a spinoff of its international business and halting a Las Vegas casino on which it hoped to lavish as much as $500 million.

That may not be the end of the matter: Crown Resorts is also "exploring potential options to monetize part of its residual shareholding" in Melco Crown, according to a separate statement. People familiar with the matter told Brett Foley of Bloomberg News that this may include a $1.2 billion block sale of the remaining 14 percent holding, clearing Crown out of Melco Crown's share register altogether.

Weak Hand
Crown's VIP business is small relative to its Macau peers, but a 45% decline in turnover could still deal a blow
Source: Bloomberg, Gadfly calculations
Note: Based on assumption of 45% year-on-year decline in December 2016 VIP turnover and theoretical win rate of 1.35%.

One reason for the changes crops up on the last page of Thursday's announcement: The volume of high-roller VIP bets placed at its Australian resorts during the first 23 weeks of the fiscal year fell by 45 percent from a year earlier, pushing total revenue down 12 percent.

That's a savage drop. VIP wagers in the previous half year amounted to A$35.7 billion, and Crown reckons it wins about A$1.35 for every A$100 wagered. If the decline plays out over the full first-half, Crown will have lost in the vicinity of A$220 million from a top line that analysts had forecast at A$1.68 billion.

Pay to Play
Capital spending on Crown Resorts' Sydney casino is set to soar over the next few years
Source: Company presentation

Crown's problem is that it's bet heavily on VIPs, particularly mainland Chinese players who've turned Macau into the world's biggest gambling hub. Alongside the company's investment in Melco Crown, it's also spending more than A$1.4 billion on a casino in Sydney catering exclusively to high-rollers, which is scheduled to open some time after 2019.

Crown's wager first took a hit in 2014 when Beijing launched a Macau crackdown, and then suffered a more dramatic leg down in October when Chinese authorities detained 18 of its employees in connection with an investigation into illegal casino marketing.

Crown and its controlling shareholder James Packer must hope the trouble will blow over, but any responsible manager needs to reckon with the risk they get locked out of China, Asia's richest source of VIP cash, entirely.

While Crown's credit metrics are admirably conservative, analysts' estimates of net debt-to-Ebitda start looking distinctly high as spending on Crown Sydney ramps up in 2018 and 2019. They'd be even tighter if you took Chinese VIP bets out of the equation.

Doubling Down
Crown Resorts' net debt-to-Ebitda ratio is forecast to rise sharply
Souce: Bloomberg, analyst estimates

How would Crown fund its development plans in that situation? One option would be to cash its Macau chips at a time when the value of that business is looking pretty healthy, and store up some capital to ensure Crown Sydney could be financed with as little debt as possible.

Backing away from Macau seems insane, but with the detention of Crown's employees in China that battle may already have been lost -- and Packer lived to fight another day after previously losing out in the bidding for one of Singapore's two casino licenses. With Japan opening a potential $40 billion market at about the time Crown Sydney is set to open, Macau won't always be the only game in town.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

(Updates third paragraph with details of possible block sale of remaining Melco Crown stake.)

  1. Las Vegas Sands Corp. has the lowest investment grade rating with Fitch and S&P, and the highest junk rating at Moody's. Genting Bhd. is scored investment grade by S&P and Moody's, but isn't rated by Fitch.

To contact the author of this story:
David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net