The number seven did not turn out to be lucky for Lai King-man. Lai was a former Hong Kong policeman turned triad who became involved in Macau's VIP gambling junket syndicates, and seven was the number of pieces that his body had been chopped into when it was found decaying in a Macau flat last month. The 60-year-old, nicknamed 'Policeman', was last seen gambling on the high-stakes tables at the Venetian Macao on September 6 when he was pulled away by a group of thugs. Tellingly, the subsequent dispute at a Taipa restaurant that led to his gruesome death was reportedly over a 20-year-old, HK$2 million gambling debt to an underground casino in Shenzhen. This appears to have been an isolated and extreme case, but the root problem that led to Lai's death is an increasingly common one in the world's largest gaming market. Macau's unprecedented casino boom has to a large extent been built on piles of debt and mountains of credit: drawn down by high rollers, underwritten by their junket agents and increasingly back-stopped by the casinos. But as the city's gaming industry enters its first downturn in a decade, this teetering pyramid of credit is wobbling from the foundation up. Indeed, Macau's VIP gaming segment, which at 75 billion patacas in the 12 months to September accounted for 69 per cent of all casino revenue, now appears to be facing its own 'subprime crisis'. Increased competition for business from high rollers and a potential cap on junket commissions 'caused looser lending by junkets who have had to compromise their usual 'know your customer' standards when determining who to extend credit to, and how much', said David Green, the director of PricewaterhouseCoopers' gaming practice in Macau. 'I suspect many debtors are either defaulting or lagging their payments, especially where they are reliant on cash flow from businesses which may themselves be suffering,' Mr Green said. Most high-roller play in Macau is leveraged: players routinely gamble more than they can back up with their cash on hand, if they can back up any of it. This is especially true of mainland VIPs, who because of Beijing's closed capital account are limited to carrying a maximum 20,000 yuan (HK$22,740) or US$5,000 in foreign currency per day across the border. Because collection of gambling debt is illegal on the mainland, and because Macau charges a 39 per cent tax on gaming revenue but allows no write-off for bad or uncollectable gambling debts, the six publicly listed companies licensed to operate casinos in the city do not lend much to players. This important function is instead outsourced to junket agents, who bring VIPs to casinos, issue them credit and collect their debts in exchange for a commission equal at present to about 45 per cent of gaming revenue. Junket agents are able to boost overall gaming volumes by issuing more credit to more players, but they need capital to do so. Last year, the Hong Kong stock market was a fantastic source of capital. Junket investors including Amax Entertainment Holdings, China Star Entertainment, Dore Holdings and Neptune Group tapped the markets for a total of HK$14 billion over the past 11/2 years. That for the most part went towards buying VIP gambling chips from casinos in Macau, which the junkets were then able to resell or, increasingly, lend to players to drive up total gaming volumes, passing on fatter rebates to customers along the way to incentivise play. The result was immediate: VIP baccarat revenue soared 52 per cent last year from 2006, compared to a relatively modest 33 per cent increase for all other table games. But all bubbles burst. Macau's VIP market peaked at 73.3 per cent growth in the first three months of this year: at 20.8 billion patacas, the city's VIP baccarat tables alone pulled in almost as much gaming revenue as all the casinos on the Las Vegas Strip and Atlantic City combined. Five days after those numbers were released in April, Macau Chief Executive Edmund Ho Hau-wah dropped a bombshell: he issued a moratorium on new casino development and said the government was mulling a mandatory cap on junket commissions. 'Before, junkets were too aggressive due to keen competition,' Credit Suisse gaming analyst Gabriel Chan said. 'Some tried to do more business before the commission-rate cap.' Government-mandated commission rates would limit junket operators' ability to entice new players with big rebates, so in the months since Mr Ho's announcement many agents instead further increased their lending to players and lengthened repayment periods to lock in market share before any cap came into force. But that stretched the junkets' pool of working capital thinner, depressing their ability to drive up volumes: the longer it takes losing gamblers to repay their debts, the less able agents are to issue new credit to new players. Worse still, failure by debtors to repay leaves the junket caught out for cash and potentially cut off by casinos. Partly due to credit crunches like this, VIP baccarat growth has begun to decline. Revenue from high rollers has fallen for the past two quarters, dropping 14 per cent between the second and third quarters. The decline in shares of listed junket investors, which are down between 83 per cent and 97 per cent in the year to date, means that tapping the markets for new capital to boost gaming volumes is a dead end. Neptune, for example, said this week it was struggling to raise HK$4.3 billion to fund a junket that would launch up to 100 tables at Galaxy Entertainment's StarWorld casino hotel. 'The dire situation would seriously jeopardise our ability [to fund the junket deal] ... if we cannot raise capital resources from the strained financial market,' the company said. In response, some casino operators have significantly increased credit to their junket agents to help keep the high rollers rolling. Las Vegas Sands Corp's net accounts receivable, which are mainly gaming debts, rose 78 per cent to US$333 million between the end of last year and September. Galaxy Entertainment Group's receivables from 'other debtors', mainly junkets, increased 91 per cent to HK$667 million at the end of June compared with six months earlier; SJM Holdings' total receivables rose 28 per cent to HK$1 billion during the same period. 'I think probably the [casino operators] are having to provide some bridging finance to the more seriously impacted junkets, but that can't go on ad infinitum,' Mr Green said. As the global financial crisis continues to deepen, once-solid credit lines issued by casinos to junkets and junkets to players will come under increasingly greater risk of turning sour. Mr Ho recently forecast monthly gaming revenue to slump to about 7 billion patacas next year, implying a 25 per cent contraction from a monthly average of 9.4 billion patacas in the year to date. If that proves accurate, Macau will almost certainly enter a severe recession - casino revenue equalled about 60 per cent of gross domestic product in the 12 months to June. No doubt some of the fall-off seen so far is due to Beijing's six-month-old crackdown on mainlanders' visiting the city, as well as the slowdown in consumer spending that has followed in the wake of the current financial crisis. But an equal measure of damage is being wrought by the 'subprime crisis' playing out behind the closed doors of Macau's private VIP gaming halls. In a sense it is a natural backlash. Macau's VIP segment probably never should have grown at a 50-73 per cent rate; the credit that fuelled that growth was unsustainably easy. The current correction, while painful, is the unavoidable hangover that follows a bumper binge. 'We stoked the fire and the flames got really hot,' said one senior casino executive in Macau. 'But now there's not enough fuel to keep it burning.'