Goldman Upbeat as Casino Bonds Withstand Crackdown: China Credit

Goldman Sachs Asset Management says Macau casino bonds that have rallied for 16 months are likely to withstand any crackdown aimed at cleaning up the industry.

Melco Crown Entertainment Ltd.’s 8.5 percent dollar notes due December 2020 rose every week this year for a 5.9 percent return, with the yield touching a record-low 6.84 percent on Feb. 14, data compiled by Bloomberg show. The yield on Galaxy Entertainment Group Ltd.’s 4.625 percent yuan securities reached

3.48 percent yesterday, the least since they were sold in December 2010. Casino stocks plunged the most since July after the Times of London reported on Feb. 5 that a crackdown on triad-linked junket operators was imminent.

“Previous cooling and policy measures have generally been positive to the long-term health of the market,” Salman Niaz, a bond-fund manager in Singapore at Goldman Sachs Asset, said in a Feb. 15 e-mail interview. “Given the high free-cash flow generated by the operators and the limited leverage, the credit profile is unlikely to deteriorate materially in the near term.”

Record-low borrowing costs will help tycoons fund more than $16 billion of expansion plans in the world’s biggest gambling hub. Melco Chief Executive Officer Lawrence Ho, son of the city’s former gaming monopoly holder Stanley Ho, said this month he hadn’t heard of any crackdown and that his casinos were “jam packed” over last week’s Chinese New Year holiday. Billionaire Lui Che Woo’s Galaxy also had 100 percent occupancy.

Adelson, Wynn

Asian casino notes rose every month since September 2011 to a record on Jan. 31, according to an index compiled by Credit Suisse Group AG, and outpaced U.S. counterparts in January by the most since May.

The former Portuguese colony ended Stanley Ho’s 40-year monopoly on gambling in 2002, and by the end of last year it played host to 35 casinos, according to government statistics. The Hong Kong units of companies controlled by Sheldon Adelson and Steve Wynn currently have plans to invest $6.6 billion on new gaming tables and hotel rooms in the city.

Casino revenue in Macau rose 13 percent to $38 billion in 2012, according to data published by the Gaming Inspection and Coordination Bureau, compared with $6.2 billion of takings on the Las Vegas strip. CLSA Ltd. forecasts annual revenue in the former colony will reach $100 billion by 2020.

‘Substantial Expansion’

“The Macau businesses are highly cash generative and there’s a substantial expansion in tables et cetera underway,” Edmund Harriss, London-based investment director at Guinness Atkinson Asset Management, said in a Feb. 14 interview. “Crackdowns are part and parcel of the industry. As a bondholder, I see the businesses as attractive.”

Guinness manages $436 million of assets and owns Galaxy’s yuan-denominated notes, Harriss said. Goldman Sachs Asset Management oversees $854 billion globally, including emerging-market debt funds that hold Melco’s Chinese-currency bonds, according to data compiled by Bloomberg.

As middlemen and moneylenders, junket operators help bring high-rollers to Macau, who account for 70 percent of casino revenue. China will clamp down on the operators after the Lunar New Year, the Times reported. Police detained people from at least three of the biggest junket companies in December, the Wall Street Journal reported in December.

“We haven’t heard anything like that,” Melco CEO Lawrence Ho said on a conference call on Feb. 6. “We continue to be very positive. This year is definitely going to be better than last year.” Galaxy, Sands China Ltd., and MGM China Holdings Ltd. all declined to comment when contacted earlier this month.

‘Headline Risks’

Macau’s government will strengthen its licensing system for junket operators and work with law enforcement to tackle gambling-related crimes, Francis Tam, secretary for economy and finance, said on Feb. 7.

“While crackdowns have resulted in headline risks, these have only moderately restrained the fundamental story,” Kevin McSweeney, a Toronto-based fixed-income manager at CI Investments Inc., which manages $74 billion of assets including casino bonds, said in an e-mail today. “Macau is an ever-growing hub. While equities are subject to growth risk, cash flow at these levels of gaming supply is excellent and pricing power should provide a tailwind.”

China’s new leadership led by incoming president Xi Jinping takes over in March, after pledging to cut lavish spending and fight corruption. A crackdown on Macau junket operators can’t be ruled out, Lantis Li, a Hong Kong-based gaming analyst at Capital Securities Corp., said in an interview yesterday.

Visitors Surge

Macau received 994,192 visitors during the Golden Week holiday from Feb. 10 through Feb. 16, with mainland Chinese accounting for two-thirds of them, according to data published by the tourist office on its website. The total represents a 21 percent jump from same holiday in January last year.

“The trends on the ground are very strong, certainly with the mass market,” said Grant Govertsen, a Macau-based analyst at Union Gaming. “Visitations and gaming levels are robust.” Revenue will climb to as much as $44 billion this year, he said in a Feb. 15 interview.

The cost of insuring Chinese sovereign bonds against non-payment using five-year credit-default swaps dropped four basis points this month to 65 in New York yesterday, according to data provider CMA. It touched 72 basis points on Feb. 4, the highest since October. The contracts pay the buyer face value in exchange for the underlying securities should a borrower fail to adhere to its debt agreements.

New Resorts

The yuan was little changed at 6.2424 per dollar as of 12:14 p.m. in Shanghai, according to China Foreign Exchange Trade System. Twelve-month non-deliverable forwards rose 0.02 percent to 6.3265, after gaining 0.11 percent last week while the onshore market was shut for the Lunar New Year.

The yield on the government’s 10-year bonds was 3.60 percent yesterday, compared with 3.61 percent on Jan. 31. The yield has climbed 25 basis points in the past six months as growth in the world’s second-largest economy accelerated.

Wynn Macau Ltd. plans to invest $4 billion in a new resort in Macau, which will add as many as 500 gaming tables, the company said in June last year. MGM China Holdings will spend $2.6 billion on its second casino resort in the gambling hub, according to an October statement.

Galaxy is allocating $2.1 billion to add 500 tables by 2015, it said in April. A new round of expansion could start by early 2014 on Macau’s Cotai strip, costing as much as HK$50 billion ($6.4 billion), spokeswoman Yoko Ku said in an interview in December.

Casino Stocks

The Bloomberg Industries Macau (China) Index of six gaming stocks dropped 6.7 percent in the two days through Feb. 7. It made up most of that decline by Feb. 15 before falling 3.8 percent so far this week, according to data compiled by Bloomberg. Galaxy’s stocks dropped 5.2 percent today, snapping a three-day gain since trading resumed in Hong Kong after the Lunar New Year. Melco shares declined 1.9 percent, following a

6.9 percent advance in the previous three days.

“The recent noise about possible regulatory changes may reduce growth expectations, which has affected the share prices but has less impact on credit,” Goldman’s Niaz said. Further efforts to improve controls, transparency and fair practices would be long-term positive for the market, he said.

Before it's here, it's on the Bloomberg Terminal.