Melco Lenders Face Crunch as Tables Fall Short of Targets

Updated on
  • Loans to build Studio City require 400 tables by Oct. 2016
  • Melco could move tables from other casinos if needed: analyst

Lenders to the newest Macau casino of Melco Crown Entertainment Ltd. face debt renegotiations as the company hasn’t gotten enough gambling tables for the $3.2 billion project ahead of requirements it must meet next year.

The company controlled by billionaires Lawrence Ho and James Packer said it “intends to proactively engage” lenders after Macau’s government authorized it to operate 200 gaming tables and 1,233 gaming machines upon the opening of Studio City scheduled for Oct. 27, with another 50 tables to start operation from January 2016. The company’s $1.4 billion in secured loans require it to have 400 operating tables by October 2016, according to Standard & Poor’s Ratings.

“Unutilized tables from other Melco casinos could likely be allocated to Studio City if there is a need,” said Grant Govertsen, an analyst at Union Gaming Group. Given the new casino is a joint venture 40 percent-owned by hedge funds while the company owns the rest, “we don’t think Melco has much incentive to transfer these tables now and, honestly, given the current demand, 250 tables may be enough for the new casino,” he said.

Melco also operates projects including the City of Dreams and Altira Macau in the city, with 619 gaming tables as of end-June, according to data compiled by Bloomberg Intelligence. Its adjusted property earnings before interest, taxes, depreciation and amortization fell 35 percent to $204.9 million in the second quarter amid a 16-month gambling downturn in Macau, hurt by China’s anti-graft campaign and economic slowdown.

Calls to Melco’s offices in Hong Kong and Macau went unanswered Wednesday on a public holiday.

Immediate Repayment

Studio City had hired Kirkland & Ellis as legal adviser and consultants Moelis & Co., which specializes in debt restructuring, due to the possibility of a lower than anticipated table allocation, according to Melco in an Aug. 12 statement. Bert Grisel, managing director in Hong Kong at Moelis, declined to comment.

A failure to meet loan requirements means banks can require immediate repayment. If that happens, bondholders are also entitled to request Melco pay back its $1.8 billion in notes outstanding right away. 

That outcome is unlikely, according to Govertsen, who said lenders would be interested to see the project become operational instead of stalling it and will probably reach an agreement with the company to change its borrowing terms. Even with fewer tables, Govertsen said, Studio City is expected to generate enough cash to repay its debt.

Hedge Fund Owners

Melco bought a 60 percent stake in the developer of Studio City for $360 million in 2011 from entities including hedge funds Silver Point Capital LP and Oaktree Capital Group as gaming earnings were on the rise and the Cotai Strip, where the project is being built, was seen as the next frontier in Macau.

Four years later, as the project is about to open its doors, minority shareholders, lenders and bond buyers face a much less profitable venture.

In May, S&P said Studio City’s revenue and profit growth in 2015 and 2016 will be slower than anticipated and the project will remain highly leveraged. The rating company also changed its forecast for gross gaming revenue in Macau to a drop of 20 percent to 30 percent in 2015 from previous expectations of a decline of as much as 10 percent.

The latest plan to amend its loan terms doesn’t affect Studio City’s bond rating even as S&P is reviewing its assumptions on gaming table allocation and revenue, Sophie Lin, a Hong Kong-based analyst at the ratings agency, said in an e-mail Wednesday.

“We believe Studio City still has time to avoid an event of technical default through several possible measures, including renegotiation of terms, obtaining a waiver, refinancing, or obtaining support from Melco Crown,” Lin said.