High leverage batters stocks of casino giants
The stock market is doing strange things to the value of Macau gaming companies lately.
Case in point: Lawrence Ho Yau-lung's Melco Crown Entertainment has now surpassed Sheldon Adelson's Las Vegas Sands Corp by market value.
Melco Crown's sole operating property is the 216-room Crown Macau and the company was valued at US$1.158 billion based on last week's closing share price of US$2.63.
Las Vegas Sands operates five casino resorts with 10,700 hotel rooms split between Macau and Las Vegas, but the company was worth US$1.155 billion on Friday after falling 11.06 per cent to close at US$1.77 per share.
Or consider MGM Mirage, which owns 10 casinos on the Las Vegas Strip and does around US$7 billion in annual revenue. That easily beats any of the other five Macau casino operators, but MGM's market capitalisation is now the smallest of them all after shrinking below Galaxy Entertainment last week (see first chart).
What's going on? More than operating fundamentals or even earnings growth prospects, price movements among gaming stocks in the year to date have been dominated by balance sheet concerns.
Shares in highly leveraged casino developers have been brutalised by the simultaneous evaporation of credit and a decline in gaming revenues in the US and Macau. Of Macau's six operators, nothing in the year so far has been a better predictor of share price performance than the size of each company's debt burden (see second chart).
Such was the case last November, when Las Vegas Sands' auditor said the company was in danger of defaulting on its loans. But the company successfully raised US$2.1 billion via a highly dilutive share sale that eased both its short-term cash crunch and investor concerns.
But the spectre of bankruptcy was again thrust to the forefront among gaming investors last week, as MGM announced it was on pace for a loan default this year and said it was attempting to negotiate debt waivers with its bankers.
The problem appears to be with the debt to cash flow ratios permitted under the terms of MGM's loans.
Faced with a slowdown in Las Vegas, MGM has been struggling to bring in new funds to remain in compliance.
The company raised a combined US$2.13 billion over the last five months by issuing junk bonds, selling a Las Vegas casino, cutting costs and scaling back new developments.
But that was not enough, and late last month MGM drew down the last US$842 million remaining on its US$7 billion credit line. Such moves sometimes precede Chapter 11 filings, as companies need cash to ride out restructuring.
MGM delayed its fourth-quarter earnings release and said it would file by March 17.
If the company cannot secure a waiver from chief lender Bank of America in the next week or so, it is possible that banks could begin calling in its loans.
MGM also warned that its auditors are likely to issue a warning about its ability to continue as a 'going concern'.