Over $3.8bln Frozen in Macau Casino Junket Deposits
Credit Suisse, an international investment bank based in Switzerland, has issued a warning on its concerns within the Macau casino industry. Over $3.8bln is locked up in bank accounts funded by junket operators operating in the region. Since the laws in the region changed, making junkets an illegal enterprise, the casinos have not been able to streamline the transition of the financial structures away from this funding source. It’s clearly a deeply complex financial engineering task that will require substantial resources to resolve. In the meantime, there are sizeable agents claims that the casinos as a concessionary party will ultimately be liable for.
The financial pressure on Macau casino balance sheets has been revealed by Credit Suisse analysts, the huge liabilities relating to the frozen junket operator deposits has left the casinos liable to pay back the funds totalling some US$3.8bln. ©3844328/Pixabay
The collapse and demise of Suncity Group last year has led to a cascade of problems that continue to reverberate around the casino business until this day. At the crux of the problem is the fact that Suncity Group unfortunately were deemed to be running an illegal business – the Chinese government exercised a law preventing companies and citizens from taking China’s currency outside of the country. This caveat meant a business opportunity for Suncity, as they expertly handled the wealth of rich Chinese nationals, and enabled them to spend their money abroad in flashy casinos and hotels.
Such a risk has followed the revelation in Macau this week that Wynn Macau Ltd, and its junket operator partner Dore Entertainment Co Ltd are jointly liable for repayment of $US 770K debt owed to a VIP player that became wrapped up in the service last year. This decision was taken and implemented at the highest level of Chinese government, and came directly following a meeting of Macau’s Court of Appeal.
This ruling has set a precedent that any casino that leaves a debt open with junket operators will be liable to repay the funds to their customers. Acting as a concessionary in the industry, there is no chance to leave the funds lying in a wallet without proper due course. The only exception to this ruling is the processing funds for the purchase of gaming chips, with the express permission from the promoter or the associated concessionary. These amendments have since been confirmed by the local government in Macau, and are now reflected in a change to the city’s gaming law.
Credit Suisse Remains Optimistic on Macau Recovery
Despite the large and prominent concerns in the Macau casino sector following the collapse of junket operators, the Switzerland based investment bank, Credit Suisse, remains optimistic that the industry can evoke a revival period in the near future. By using market metrics and financial modeling techniques, the analysts working at Credit Suisse were able to accurately predict the liability levels by obtaining the 3x monthly rolling to capital ratio – a regulatory requirement that can be assumed and used to derive other balances on the financial statements.
The bank remains fairly measured on its approach to Macau’s recovery, whilst there are reasons to be optimistic and hopeful, they have become less bullish in recent weeks given a renewed outbreak of COVID-19 across the region. With case numbers rising again throughout mainland China, there are fears that the country could drift back towards a heavy lockdown, the likes of which have not worked out well for casinos in the past.
Looking ahead to the future, and the outlook remains incredibly positive for the casinos operating in this space, the Credit Suisse analysts suggest that a return to daily gross gaming revenues could surpass US$50M, by the end of 2022. So aiming for a revival in the 4th quarter doesn’t seem too unreasonable at this phase, especially given the clarity investors now have on the potential impact on footfall for the next 6 months.
Essential top-line metrics have also had a difficult time getting a rebuff this year. EBITDA, the earnings before interest, tax, depreciation, and amortization were cut to lower levels 72% and 20% – given these forecasts it is expected that revenue will climb back to its 2019 levels before or in line with 2024 Q1. It’s some way off, but over the next 12 to 18 months the casinos will reorganize their revenue models, and find new innovations to get away from the heavy reliance on junket operators that has previously disrupted their business.
