Gaming chips | Wynn Resorts bondholders see USD400M erased in Macau squeeze

The Wynn Las Vegas, right, and its sister hotel, Encore Las Vegas, are seen in Las Vegas

Add bond investors to the long list of people losing money on Wynn Resorts Ltd.
Almost USD400 million in market value has disappeared this year from the $4.5 billion of fixed-income securities issued by the Las Vegas-based company. That’s on top of the $9.3 billion in value lost by stockholders. Wynn Resorts shares are down 60 percent this year.
Like other casino operators with business in Macau, Wynn has been suffering through a 15-month slump, caused by a crackdown on corruption on the mainland and a slower economy in China. The company is more reliant than its peers on that market, and particularly the high-rolling VIPs whose business has dropped off the most. Chris Snow, an analyst at CreditSights Inc. in New York, said the bonds could go lower.
“The liquidity situation is very tight, and the market fundamentals are pretty negative,” Snow said. Those factors “will continue to put pressure on the bond price.”
The biggest hit for fixed-income investors has come in Wynn’s 5.5 percent bonds due in 2025. Issued in February at par, they have dropped 5.7 percent this month alone, and are now trading at 86.75 cents on the dollar.
Betting in Macau fell 36 percent in August to 18.6 billion patacas ($2.3 billion), following July’s 34 percent drop, according to data from Macau’s Gaming Inspection and Coordination Bureau.
Wynn Resorts received 70 percent of its revenue from Macau, the former Portuguese colony off of China’s coast, last year, according to Bloomberg data. That compares with 64 percent for Las Vegas Sands Corp. and 34 percent for MGM Resorts International Inc.
Wynn also has more high-rollers, the gamblers whose activity has dropped the most in the past year. Wynn received 67 percent of revenue its last year from these customers, compared with 60 percent for the market as a whole, according to Deutsche Bank data.
“Wynn is more exposed to what’s going on in Macau than the others,” said Keith Foley, an analyst at Moody’s Investor Service in New York. “Macau makes up the majority of its revenue and earnings. Their focus tended to be on the VIP section, and that’s the segment that’s getting hurt the worst.”
One particular concern for investors is the new capacity coming online. Wynn and other casino operators have more than $14 billion in new properties scheduled to open in the next year that could prompt a price war in Macau, even as the new casinos add to the debt load on their balance sheets.
Wynn has two casinos under construction: the $4.1 billion Wynn Palace, scheduled to open in Macau in the first half of next year, and the $1.6 billion Wynn Everett, outside Boston, scheduled for late 2017.
Construction of the two properties will cause Wynn’s debt level to spike by the end of this year, with total borrowings amounting to 6.7 times the company’s earnings before interest, taxes, depreciation and amortization, according to Alex Bumazhny, a director for gaming, lodging and leisure at Fitch Ratings Ltd. in New York. He expects that ratio to improve after Wynn Palace opens next year. If the project doesn’t produce the $350 million in annual Ebitda he expects, or if it takes business from Wynn’s existing Macau resort, Fitch may have to reevaluate the credit rating, Bumazhny said. Fitch currently rates the company BB, two levels below investment grade.
To conserve cash, Wynn Resorts cut its quarterly dividend to 50 cents a share in April, from the $1.50 it paid previously. It could cut the payout further to preserve its credit rating, according to Foley.
It would be “foolish to issue dividends on borrowed money,” company founder Steve Wynn said on a conference call at the time.
The 7.4 percent current yield of the 2025 bonds is closer to that of a BB- rating, below its current score, according to Bloomberg data.
“Downgrades wouldn’t be a surprise,” Snow said of the company’s credit rating. Christopher Palmeri and Cordell Eddings, Bloomberg