August, 10, 2014
The last time billionaire James Packer bet on Las Vegas's casino industry he lost A$1.37 billion (NZ$1.5 billion). Bond risk on his Crown Resorts has risen to a six-month high as he prepares to spin the wheel again.
Crown is the worst performer in the iTraxx Australia index of credit-default swaps in the past three months, with contracts climbing to 126 basis points on Wednesday. The Melbourne-based company said on August 4 it had paid $280 million for a 34.6 acre (14 hectare) site on the Las Vegas Strip to build a new casino in a venture with former Wynn Las Vegas President Andrew Pascal.
The latest plan lifts Crown's projected spending on resorts due to open by 2020 to about $10 billion, according to Credit Suisse Group.
The Nevada complex alone could cost as much as $4 billion, Deutsche Bank said. The investments will deplete cash as gambling growth in Macau, where Crown has a stake in the City of Dreams casino, is poised to slow.
"The Las Vegas land purchase further reinforces the company's aggressive growth strategy and may weaken credit metrics," Raymond Lee, who helps manage about A$7 billion at Kapstream Capital Pty in Sydney, said on Wednesday. "This new project will likely result in significant capital spending in addition to the existing projects."
Packer, who is Australia's third-richest person and Crown's chairman and 50 per cent controlling shareholder, has ridden an Asian consumer boom since the company's December 2007 listing. His is now the world's only gambling company judged investment grade by all three major ratings companies, with a BBB rank at Standard & Poor's and Fitch Ratings and Baa2 at Moody's Investors Service.
Crown owns part of the City of Dreams in China-controlled Macau through its 34 per cent stake in Melco Crown Entertainment and also targets Asian high rollers traveling to Australia. So-called VIP gamblers' losses accounted for about 27 per cent of its revenue in fiscal 2013, with A$50.7 billion of such bets wagered in Melbourne and Perth, according to the company's latest annual report.
Free cash flow per share, a measure of financial agility showing Crown's available funds after capital and operating expenses, rose almost 10-fold last year, the fastest rate of any gambling company worldwide, Bloomberg-compiled data show. That period of low-cost growth may be ending as Crown and its partners look at developing as many as six new casinos, including the Vegas complex.
"We see the announcement as a potentially negative development for the credit," Gus Medeiros, a credit strategist at Deutsche Bank, said in an August 5 note about the purchase, citing "uncertainty around the related capex, which will add to the ongoing sizeable project pipeline."
Karl Bitar, a spokesman for Crown, declined to comment on the company's plans.
Crown's previous major US forays were costly. Writedowns and charges tied to five Las Vegas investments, including the derelict Fontainebleau hotel, came to A$1.37 billion in 2008 and 2009, according to a company presentation.
Alongside the US project, Crown has promised to spend A$1.3 billion on a casino hotel in Sydney to open in 2019 and is working on projects in Brisbane and Sri Lanka. Melco Crown is studying new resorts in the Philippines and Japan and building a Zaha Hadid-designed hotel tower in Macau scheduled to open in 2017.
The new venues could cost as much as $10 billion, with Crown sharing the outlay through partnerships and associated property sales, Larry Gandler, a Melbourne-based analyst at Credit Suisse, wrote in an August 5 note. That compares with about A$2.19 billion it's spent on capital projects since listing almost seven years ago, data compiled by Bloomberg show.
Crown is contemplating the prospect of eventually floating its new Las Vegas business in a bid to offset the project's costs, the Australian newspaper reported today, without saying where it got the information.
The company's shares have fallen 5.1 per cent this week to A$15.18 on Thursday in Sydney.
Crown has A$300 million of July 2017 bonds outstanding and A$532 million of hybrid notes, data show.
The company's CDS have climbed 9 basis points in the past three months to the highest level since February 6 even as a global credit rally compressed costs for the 25-member iTraxx index to near the lowest in four years, CMA prices show. The premium over the Australian benchmark was 36.7 basis points, close to the gap of 37 reached in June that was the most since September 2013.
To be sure, the flood of money into Macau's casinos gives Packer a ready source of funds.
Quarterly gaming revenues there have risen more than four-fold since Crown listed to peak at 102.5 billion pataca ($12.8 billion) in the three months to March. That compares with the $9.68 billion Las Vegas casinos made in the whole of 2013, according to Bloomberg Intelligence data.
Melco Crown will pay 30 per cent of its net income in quarterly dividends to shareholders including Crown, the Hong Kong-based company said on February 14. That amounts to about $1.11 billion of cash payments by the end of 2016, according to a calculation based on analyst estimates of $3.7 billion of net income over the period.
Even so, Macau's period of explosive growth may be over. Casino revenue fell in June for the first time in five years, and then dropped again again in July. It'll grow by less than 10 per cent this year, according to the territory's government, compared with an average rate of 30 per cent the past eight years.
Crown's management have always been clear about their determination to maintain their BBB credit rating, said George Bishay, a portfolio manager at BT Investment Management who helps manage about A$15 billion in Australian fixed income, including Crown debt. Any spending that would strain that measure should come from an equity raising rather than new debt issuance, he said.
"You have a big capex bill coming in 2018," Killian Murphy, an analyst at CIMB Group Holdings in Sydney, said by phone. "Vegas isn't the growth market Macau has been."
- Bloomberg
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