World’s biggest gamblers can’t halt Aussie casino bond risk jump

James Packer, co-chairman of Melco Crown Entertainment Ltd., listens during a news conference at Studio City casino resort

Crown Resorts Ltd.’s local market may be home to the world’s biggest gamblers, but debt investors are less eager to bet on Australia’s largest casino operator as its Macau business suffers.
Bond risk for the company controlled by billionaire James Packer has risen the most in Australia over the past three months as China’s corruption crackdown and a slowing economy weigh on revenue at its Melco Crown Entertainment Ltd. venture. Melbourne-based Crown has also seen its debt burden increase as it finances the development of Australian attractions. It’s also considering a new venue in Las Vegas.
“Melco constitutes a significant portion of Crown’s overall earnings profile, so given the weakness in the market there, that certainly is being reflected in expectations for future profits,” said Michael Bush, Melbourne-
based head of credit research at National Australia Bank Ltd.
The cost of protecting Crown Resorts debt against non-payment has risen 42 basis points over the past three months to 213 basis points as of Dec. 4, the worst performance in the 25- member iTraxx Australia index of credit default swaps. Its CDS last month touched the highest versus the benchmark gauge since 2009, according to data compiled by Bloomberg.
Casino operators in the Chinese gambling hub of Macau saw a 32 percent slump in revenue in November from a year earlier and it’s fallen for 18 straight months, data from the city show. The region’s Chief Executive Chu Sai On said last month he expects further declines.
Crown’s net income after adjusting for one-time items and an unusual rate of winnings was A$526 million (USD386 million) for the year ended June 30, down 18 percent from a year earlier. Although so-called normalized revenue for the company’s Australian resorts increased 14 percent to A$3.21 billion, the profit received from its stake in Macau-focused Melco Crown slumped 45 percent to A$129.9 million.
In Australia, the local penchant for wagering has shown little sign of abating, with Aussies frittering away A$24.1 billion on gambling in the 12 months through September, government data show. That equates to about A$1,000 for every man, woman and child. The country’s punters are the world’s biggest spenders on gambling, with per person losses exceeding the likes of Hong Kong and Canada, according to the latest figures from Global Betting and Gaming Consultants.
In addition to home-market developments such as Barangaroo in Sydney, Crown is also contemplating plans for a new resort in Nevada and earlier this year acquired a stake in restaurant and hotel owner Nobu for $100 million. Crown’s net debt increased 47 percent to A$2.5 billion in the last financial year.
“The development pipeline, they’ve added a few things here and there to it, but in essence the development pipeline now isn’t that much different to what it looked like three or six months ago,” said NAB’s Bush. “The thing that has changed is that the risks in the Melco investments are rising further.”
The yield premium over the swap rate on Crown’s November 2019 Australian dollar bonds widened to 219 points as of yesterday, up from 165 a year earlier, based on Commonwealth Bank of Australia pricing. Crown’s credit-default swaps last month reached as much as 104 basis points more than the benchmark iTraxx index, while the gap was at 89 at the end of last week.
The company’s shares have also slipped this year, although they’ve rebounded 15 percent from the almost three-year low they touched in September.
Ken Barton, Crown’s chief financial officer, didn’t immediately reply to a message left at his office seeking comment on the company’s bond risk.
“Macau is currently experiencing a difficult period which has adversely affected all casino operators,” Crown Chief Executive Officer Rowen Craigie said at the company’s annual meeting in October. “However, MCE believes that through the strong leadership from the Macau and Chinese governments, the ongoing build-out of significant local and regional infrastructure, together with an expanding and increasingly affluent Chinese middle-to-upper-class, Macau remains the world’s most important and exciting gaming market over the longer term.”
Crown is rated two steps above junk by Standard & Poor’s, Fitch Ratings and Moody’s Investors Service. Fitch Ratings this week said the outlook for Australia’s gaming operators was stable, while noting that Australia’s economy has slowed and that both Crown and its biggest rival Star Entertainment Group Ltd. are embarking on debt-funded projects.
“Robust operating cash flows should allow them to expand successfully despite a weakening broader economy,” Fitch wrote. “Crown’s leverage is likely to be under pressure during the construction phase.” Benjamin Purvis, Bloomberg