Wynn Casino’s Naked Bonds Fly on Macau Growth Bet

Wynn Macau Ltd.’s sale of $600 million of notes this month without conditions on further borrowing underscores soaring demand for Asian gaming debt even as economic growth slows in China.

The yield on the casino operator’s eight-year 5.25 percent U.S. currency securities dropped 29 basis points through yesterday from their issue on Oct. 16, data compiled by Bloomberg show. Bonds sold by Melco Crown Entertainment Ltd. returned 7.95 percent this year versus 0.05 percent for the Bank of America Merrill Lynch Asian Dollar Corporate Index.

Wynn’s sale of high-yield notes lacking protections found in similar products came as analysts from Credit Suisse Group AG and Standard & Poor’s said a slowdown in China is the main risk to Macau’s gaming market. Gambling revenue in the former Portuguese colony climbed to 89.4 billion patacas ($11.2 billion) in the quarter through Sept. 30, 10 times what passed through the Las Vegas Strip in the period.

“It is remarkable and off-market for a high-yield rated issuer to offer bonds that have no covenant protection,” said Alexander Diaz-Matos, an analyst at Covenant Review LLC, an independent credit research firm in New York. “Even A-rated investment-grade credits include liens covenants in their bond offerings.’”

The Wynn Macau notes issued this month didn’t contain covenants restricting further borrowing, dividends, asset sales or securing of new lending via liens, according to Covenant Review. Diaz-Matos described the Wynn Macau bond conditions as setting a “terrible market precedent” in a note dated Oct. 10.

Indirect Protection

Investors in the bonds can rely indirectly on protection from covenants attached to a $2.3 billion secured credit facility at Wynn Resorts Macau SA, according to Michael Paladino, a senior director at Fitch Ratings. Those conditions limit leverage and require minimum interest coverage, he said. Fitch rates the credit facility an investment grade BBB-, while Wynn Macau and its recent bonds are both rated BB.

“That does not protect investors from additional debt incurrence at Wynn Macau Ltd., which can dilute the credit at that level and certainly presents a risk that we highlighted,” said Paladino, who heads Fitch’s gaming, lodging and leisure sector coverage in New York. “The Macau gaming market has materially outperformed this year, with the VIP segment being more resilient than most market participants anticipated entering the year, so that helped demand for this deal.”

Record Revenue

Gaming revenue in Macau has soared as the number of mainland Chinese visiting Macau climbed to a record 1.88 million in August, according to Bloomberg Industries data. Macau’s gambling revenue was $38 billion in 2012.

Wynn Macau reported third-quarter adjusted property earnings before interest, taxes, depreciation and amortization, or Ebitda, that rose to $329.1 million from $292.2 million a year earlier, according to an Oct. 24 statement by Las Vegas-based parent company Wynn Resorts Ltd. That surpassed the $300.6 million average estimate of 10 analysts surveyed by Bloomberg. The shares climbed 0.2 percent to HK$29.75 in Hong Kong today.

Net revenue climbed 9.6 percent to $997.6 million, a record, surpassing the $996 million generated in the fourth quarter of 2011, according to Bloomberg Industries. The company had $1.23 billion in cash and near cash items at the end of June, up from $834 million at the same time last year, according to Bloomberg data.

Sands China Ltd., Galaxy Entertainment Group Ltd. and Melco Crown have been expanding on Cotai, a piece of reclaimed land that is Macau’s equivalent to the Las Vegas Strip.

Wynn Palace

The yield on Galaxy Entertainment’s yuan bonds due December 2013 fell three basis points this year to 4.436 percent yesterday, according to data compiled by Bloomberg. The rate slumped from a record 9.96 percent in October 2011.

Wynn Macau plans to open the $4 billion Wynn Palace on the Cotai strip by Chinese New Year 2016. With the sale of the bonds this month, that development is now fully funded, Matt Maddox, chief financial officer of Wynn Resorts Ltd. said on an Oct. 24 conference call with analysts, according to a transcript.

Maddox declined to comment on the Wynn Macau bond offering when the company was contacted separately by Bloomberg on Oct. 29.

“The likelihood of Wynn Macau being unable to pay back bondholders is minuscule,” Grant Govertsen, Macau-based managing partner at Union Gaming Group said by phone Oct. 29. “Wynn is sitting on a lot of cash. It may not be riskless but it’s pretty close because Macau casino growth has been exceptional.”

‘Such Fun’

Steve Wynn, chairman, chief executive officer and co-founder of parent Wynn Resorts, described the growth of Macau’s casino market as “remarkable” and unprecedented in modern history during the Oct. 24 call with analysts, the transcript shows. He also remarked on the interest rate environment, according to the transcript.

“It’s a wonderful time to borrow money,” Wynn said. “It’s a shame that we’re all done doing it. It’s been such fun, and it’s been so terrific for the company’s balance sheet and for our future. We’re very proud of that.”

The 5.25 percent coupon on the Wynn Macau bonds compares with 7.875 percent paid by the Las Vegas subsidiary of Wynn Resorts on similar-maturity notes in 2009. Non-investment grade Asian borrowers pay 7.6 percent, according to JPMorgan Chase & Co. indexes.

China’s central bank has signaled it may be shifting toward a tighter monetary policy as economic growth rebounds. The yield on the Chinese government’s 3.48 percent bonds due July 2014 jumped 30 basis points to 4.10 percent yesterday, according to data provided by the Interbank Funding Center. That’s the highest for a benchmark one-year sovereign note since at least 2007.

Injections Resumed

The increase came even after the People’s Bank of China resumed injecting funds to the financial system using reverse-repurchase agreements for the first time in two weeks on Oct. 29. The yuan fell for a fourth day, the longest losing streak since July. The renminbi slipped 0.06 percent to close at 6.0938 per dollar in Shanghai, extending a four-day drop to 0.19 percent, China Foreign Exchange Trade System prices show.

Surging money market rates stoked concern that China’s leaders would take further action to suppress shadow banking activity in the mainland, leading to slower growth.

Standard & Poor’s analysts identified the risk of “less robust economic growth” in China as one of the factors that might lead to a meaningfully weaker performance in Macau gaming. S&P rated Wynn Macau BB+ and the notes issued this month one notch lower at BB.

Asia Issuance

“We believe the risks to gaming stock prices will not come from the near-term solid Macau macros, but from any unexpected changes in China macros,” Credit Suisse Hong Kong-based analysts Kenny Lau and Isis Wong wrote in a note dated Oct. 29.

Including Wynn Macau’s $600 million securities, casino companies in Asia have issued $1.98 billion in bonds this year. That compares with $23.8 billion sold by real estate entities in the region and $9.2 billion priced by gaming firms in the U.S., according to data compiled by Bloomberg.

“Casino bonds have been very popular with investors in the U.S. while Asian investors don’t have many opportunities to tap that market,” Gordon Tsui, deputy chief investment officer at Hang Seng Investment said by phone Oct. 29. “The lack of regular casino bond offerings tends to push the prices higher.”

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