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Cotai Blues
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A huge spanner has been thrown into the works of Macau’s casino engine on the Cotai Strip as credit dries up, projects slow or freeze and the city as a whole slides into economic gloom. Paulo A. Azevedo reports with Olívia Alonso
It's a definite sign of the times, the previously red-hot Cotai Strip has hit the financial equivalent of a brick wall. A signficant number of the projects planned for the prime site are way behind schedule, others have stopped completely and a few more will only proceed when the crisis recedes and its negative impact on investor confidence and the banking sector eases off.
They could have a long wait.
A number of sources Macau Business has spoken to are adopting a "wait and see" strategy which could lead to recently finished buildings not actually being used but kept in cold storage for better times.
These project financing difficulties and the slowdown of the local economy – underlined by China's individual visas restriction – are also raising concerns outside Macau.
Singapore is also anxious to know all about the dangers of the huge drop in gaming stock prices, particularly those of Las Vegas Sands, as well as how difficult the big players are finding raising the finance they need.
Emergency meetings
The crisis has prompted several "emergency meetings" at the highest level aimed at finding formulas which will enable companies to face the fast-approaching instability and danger, but also to map out strategies to avoid panic among analysts, investors and banks – although it may be a little too late for that.
The idea is to prevent any breakdown that may force the gaming operators to default on their financing payments, either because profit margins are too narrow or because gambling in Macau may stop generating the billions that, until a few months ago, seemed never-ending.
Already, the financing problem and the quest to find ways to alleviate the pressure on investors has led to two meetings between Las Vegas Sand's boss Sheldon Adelson and Chief Executive Edmund Ho hau-wah, followed by another between Adelson and Francis Tam, the secretary for finance and economy.
At the recent opening of local businessman David Chow's Legendale Hotel in Beijing, the dark clouds hanging over the gaming sector were very at the top of the list of conversations between Steve Wynn and Francis Tam, despite the fact that the American billionaire sits in a more confortable position than his arch-rival Adelson, as all he has to worry about is finalising the construction of Wynn Resort's second tower.
In the Chinese capital, Steve Wynn explained to Macau Business: “We are very secure, have a very well-balanced balance sheet because we were less aggressive then some others.”
In this less stressfull situation, Wynn even found the time to wish his fiercest competitors good luck: "I certainly hope that all of the other developers of resorts in Macau find a way to deal with the problems properly,'' he said.
Wynn can also took advantage of the moment to get public plaudits by saying that if his competitors are able to get through their troubles, the most important objective of all – "to protect the jobs of those in the business'' – will have been achieved.
Not all gloom
Despite the gloom, Melco Crown as publicly declared that its City of Dreams "remains on target to open to the public during the first half of 2009".
"Construction activity will be maintained at maximum capacity through to the end of 2008 to deliver the construction timetable to completion,'' the company in a note sent to investors on 17th October.
In a note sent to Macau Business, Jefferies and Company's analysts said they were optimistic that MGM and Dubai World, which are currently building City Center on the Las Vegas Strip, will obtain the US$ 700 million (MOP5.59 billion) they are looking for to fully fund the project.
MGM say they recently received a US$1.8 billion loan along with bank commitments for an additional US$500 million in funding for the City Center project.
The Cotai project may have to wait because construction hasn't even started. Therefore, the company is under less pressure and, in the foreseeable future, has only to worry about revenues from the only property it owns on the Macau peninsula.
However, as Dow Jones reported late in October, MGM Mirage’s net income fell 67 per cent in the US's third-quarter and the company said it was suspending plans to build new casino properties in Las Vegas and Atlantic City because of the credit crunch.
Former MGM chairman and chief executive Terry Lanni told Dow Jones that pre-development work has been done on the MGM Grand Atlantic City, but the company will halt development until the economy and capital markets "are sufficiently improved''. MGM has been struggling to find financing to complete construction of its US$11 billion City Center project on the Las Vegas Strip.
As for Sociedade de Jogos de Macau (SJM), they are not expecting many headaches from the current economic meltdown: "We are leveraged, we have very little debt and we are not under financial pressure,'' company director Ambrose So said.
"SJM is not slowing and we are not cancelling any projects. As you know our number one project is the redevelopment of the Hotel Lisboa and we have picked our shortlist of designs. This takes some time as will full construction. We don't have the pressure of having to raise financing from the market for the next one or two years. We can deliver The Oceanus project with our own resources,'' So added.
The SJM director even found time for a little irony, saying: "Luckily for SJM we don't have too much land in Cotai as you know, like the others".
Shipwrecked
Waiting for better days, Macau Studio City seems to be "shipwrecked", with a deserted parcel of land and only a few of its foundations showing, while Galaxy's two new units are advancing slowly. The latter's hotel on the Cotai Strip, which was previously expected to open this year, will fail to meet that deadline and the second tower, home to the Okura Hotel and Banyan Tree, may not open when completed.
As far as Macau Business was able to gather, shareholders have been told the company is on a new timetable and which effectively puts developments on hold. One thing is certain, the next phases are "frozen for the time being".
From the government's point of view, all these delays and project slowdowns may not be a problem.
The government understands the difficulties that some concessionaires are facing and that some of those problems are due to external factors. But they may not be in such a benevolent mood when faced with a growing lobby for a cut in gaming taxes.
The operators are adamant that could be a way out of the current crisis. But one analyst told Macau Business that, politically, the scenario would be hard for Edmund Ho to manage, considering he has been criticized for giving too much to the gaming operators, especially when it comes to the vast areas of land sold at "sale prices", to quote legislator Au Kam San.
Spotlight on LVS
The focus at present is very much on Las Vegas Sands (LVS), with its shares plunging 95 per cent in the space of 12 months and with billions of dollars in debt giving the company a poor market capitalisation, has sent cold shivers down investors' spines.
However, just after the meetings with Ho and Tam, Adelson's company announced that the Macau Government had approved the legal separation of the company's Four Seasons apartment hotel tower on the Cotai Strip from the other components of its Four Seasons parcel.
The measure allows LVS to shift the apartment hotel building into a separate cooperative holding company and to sell cooperative interests in the tower.
A week later, on October 29, the official gazette published the concession revision of lots 1, 2 and 3, given to Venetian Cotai S.A. by the government.
According to the new version of the concession, Venetian now has four separate lots of horizontal ownership instead of just a single block. The intention is clear: to allow "the autonomization", as a fraction, of each of the blocks destined for its own use – hotel, aparthotel, mall and parking silo.
The document explains that this allows the concessionaires to offer the different blocks as guaranties, "specifically to mortgage the blocks". The transition to horizontal ownership allows for fractional mortgaging. Otherwise, as initially determined, the mortgage would affect the entire property.
Within this same strategy of alleviating any doubts and of guaranteeing the much sought-after banking finance, the Venetian has also announced other options to raise cash, such as selling non-core assets like retail space and vacation suites.
In an interview with Macau Business, Stephen Weaver, LVS Corp. Asian Region President, guaranteed that both options "were always part of our strategy". Regarding the retail space at The Venetian and Four Seasons, the possibility of its sale was merely announced.
"We just wanted to say what could be done,'' explained Weaver. "We don't need to own the malls forever, we are developers,'' he added. A similar situation occurred in Las Vegas, where the company sold its Grand Canal Shops in a multi-billion deal. Just one more enticing factor to assure financiers.
The same may happen with the famous aparthotels, which have generated some distrust in Macau, despite the fact that they were part of the concession contracts since the beginning. The solution here will not be to sell them – since the government won't allow it – but, for example, to sell shares in an anonymous entity.
In other words, instead of real estate ownership rights, investors will be entitled to a bond ownership right. Since they won't actually own the apartments, investors won't be able to sell them, but they'll be able to sell the shares that entitle their owners to use the ultra-luxurious apartments managed by Four Seasons.
If the agreement allows it, they may also be eligible for financial compensation in exchange for allowing a third party to use the apartment.
With these two alternatives, LVS seeks to gain points in a battle that promises complexities, at a time when LVS is in the market to procure US$2.5 billion in financing to complete funding for its projects.
Adelson, who recently invested $475 million of his own money in the company to keep it from breaching a loan covenant, has said LVS had been seeking funds from Asian banks which haven't been hit as hard as those in the US by the credit crisis.
Eyes bigger than their stomachs?
Ambrose So doesn't pull his punches when asked about LVS's strategy: "People thought that the free traveling scheme would increase forever and that casino's operations in Macau would expand forever. So a lot of players were expanding big and offering a lot of products to the market not realising that there is a cycle.
"With the restriction of free traveling scheme and the economic crisis, people were caught off guard. I would say that for those people who have expanded too much, who leverage too much, they will have a difficult time ahead because now we are talking about the leveraging and you can't leverage a lot. Besides, if you have a big debt to equity ratio that's a serious problem,'' said So.
On the other hand, Steve Wynn, who was criticized in Macau for slowing down his pace of investment when the first visa restriction was introduced is collecting his bet.
"If the government wanted to slow things down on the speed of the development, then it seemed like they were sending a message to us. So we followed the government's lead and said, ok, when the government thinks it's appropriate for us to get more aggressive they will let us know. We are trying to learn how to listen in China," he explained to Macau Business with a barely-hidden smile on his lips.
