oncessions in the glitzy enclave that will start expiring in 2020 for the six licensed operators are a key concern for international banks that say a lack of clarity over the renewal process is a clear deterrent for them to invest.
An hour away from Hong Kong by ferry, the former Portuguese colony has been a goldmine for international investors, producing revenue streams set to exceed those for rival Las Vegas by at least five times this year. With a string of new casinos in the pipeline and unsatiated demand from mainland gamblers, Macau's potential is still huge.
Annual gambling revenues are estimated to hit $50 billion by 2015, more than the GDP of Sri Lanka, Bulgaria or Costa Rica.
International investors are becoming cautious however, asking how and if the six concession licenses will be renewed. The possibility is slim though that the government will revoke them completely. The six licensed operators are: MGM Resorts' MGM Macau, Las Vegas Sands' Sands China, Wynn Resorts', Wynn Macau, SJM, Galaxy Entertainment and Melco Crown.
U.S. casinos operating in Macau may be most affected and forced to cede more control of their multi-billion dollar properties, relying more on Chinese investment to cement their places in the world's largest casino gambling destination.
The risks are obvious for lenders considering whether to invest in upcoming casino projects, many of which have hazy completion dates and have yet to be formally approved by the government. "It will just be a waste of time for us to do loan syndication when the borrower has not secured all the government approvals," said a senior loan banker with an international bank.
Casino mogul Steve Wynn's Wynn Macau, along with MGM Macau and SJM, are awaiting final approval from the government to begin construction on their new multi-billion casino properties located on Macau's Cotai strip, a stretch of land under development that is currently home to billionaire Sheldon Adelson's Venetian.
If the approvals come within the year as casino executives have repeatedly said they would, the earliest completion date for a new property is 2015. That does not factor in potential labor disruptions or a financial slump similar to 2008 when Adelson was forced to halt construction of his Cotai property.
Chinese Banks eager to dominate
Chinese banks have said they are ready to step in to fund new projects and are less concerned about the potential regulatory risks because of their close ties with the Chinese government. Industry analysts say Chinese banks have either obvious or indirect backing from the government, so they are more likely to be aware of any future plans regarding Macau's casino industry.
"The license expiry doesn't bother us at all when it comes to extending a loan to these gaming operators. We don't see any reason why the government would not renew their license to them in 2020 unless they do something terribly wrong," said one banker at a major Chinese bank.
Chinese banks usually lend to Macau casinos by issuing syndicated loans with tenures of between five to seven years. Industry analysts say banks may also issue convertible bonds, potentially diluting the equity stake of the Hong Kong-listed firms. The extent of the dilution will depend on the strike price for the convertible bond and the investment in the new properties.
Investment by Chinese lenders is increasingly being favored by officials over foreign capital, Macau law professor Jorge Godinho said. "I do see that the government is encouraging more investment, particularly, local Chinese, Chinese capital, to invest in Macau's gaming and entertainment industry, so as to balance the formally lop-sided American interest," he said. "It is quite different from what we saw about five years ago when American interest was so very visible in Cotai that I would say Macau was invaded by Americans."
The government of Macau says it does not choose which banks take part in financing new projects and only demands the banks receive approval from the government before they issue any funding. "The concessionaires must have our approval to get finance. Any financing must have our approval. They choose the banks, they choose the way they do the finance," said Manuel Das Neves, director of Macau's Gaming Inspection and Coordination Bureau. "All the banks will certainly not finance without the government's acknowledgement or approval."
Some analysts point to the strong cash flow generated by existing Macau properties as evidence operators will have few problems in repaying lenders.
Gabriel Chan, Credit Suisse's gambling analyst in Hong Kong, cites SJM as an example. Run by tycoon Stanley Ho, known as Macau's casino king for his former monopoly hold on the industry, SJM is likely to have more than us$ 2 billion in net cash by the end of this year.
Wynn Macau and MGM China may not have the same cash flow clout at the local level because they may need to repay their U.S. listed parent firms in dividends, he said.
With an opaque regulatory system and a new Chinese leadership set to take the stage next year, international investors on the equity side are also likely to remain cautious. Macau casino shares have skyrocketed in the past year, with Galaxy Macau, owned by Hong Kong construction property mogul Lui Che Woo, more than tripling in value.
"This is definitely an issue," said a buy-side analyst involved in MGM China's recent initial public offering. "Greater risks are associated with these projects right now without any clear indication from the government. Cost of capital should necessarily increase for them and that is clearly not good."