Inside Asian Gaming

INSIDE ASIAN GAMING | September 2011 10 Asian Gaming 50 – 2011 to their Asian projects. As well as taking on large amounts of syndicated bank debt, they have also had a penchant for issuing fresh equity. Often that equity has been used to strengthen group balance sheets previously weakened by ambitious projects in home markets in the United States at a time of domestic economic downturn. The equity hasn’t always found its way into the balance sheets of their Asian operations, even if those companies are happy to raise funds from Asian investors and support their share prices on the strength of the Asian gaming story. By contrast, investors in Galaxy arguably have a lot more transparency. The company’s gaming operations are based solely in Macau. GEG doesn’t have highly leveraged foreign casino businesses that need propping up in markets with anaemic or sluggish economies. That’s not to say GEG lenders and investors have always had a smooth ride. Readers familiar with Macau will recall the bond buy back conducted by Galaxy in early 2009. The flexibility of the bond route (for the indebted party) came to the fore when the company bought out US$170 million worth of its debt for around 50 cents on the US dollar. It was able to do so because some lenders needed liquidity in the wake of the global financial crisis that began in late 2008. GEG later also bought back a further US$50 million of convertible securities. UK-based private equity firm Permira’s US$842 million equity stake in GEG and its parent K. Wah purchased in November 2007 famously lost 94% of its value within a year of the deal, thanks to the investor jitters created by the Western debt debacle. But by June this year Permira’s Galaxy investment had more than doubled in value to US$1.7 billion. Having weathered the storm thus far, Permira indicated at the time IAG went to press that it had no plans to sell its stake. Galaxy has boosted its returns and punched above its weight in terms of capital efficiency by showing that it really understands its players and junket partners, cares about them, and wants their repeat business. It has shown this with the speed that it has been able to build up both its VIP and mass-market business at Galaxy Macau. Just about every business on the planet pays lip service to the idea of cultivating customer loyalty, but not every company practises what they preach. Galaxy does. Success in VIP gaming has been the cornerstone of GEG’s Macau success. If you speak privately to those in the junket trade—which currently delivers 74%-plus of Macau’s gross gaming revenue—they will tell you that the support provided by Galaxy is second to none in Macau. That’s not only in terms of things such as cage capital to support the liquidity of junkets—a particular issue for new junkets just starting out that may not have yet had time to build up a large pool of players— but also in terms of facilities. Mr Lui and his management team listened very carefully to the junkets before fitting out its eight VIP rooms at its flagship property Galaxy Macau. And it didn’t skimp on fixtures and fittings. It chose to give the high rollers a distinctively Chinese sense of luxury in an international resort setting. It’s all a long way from the gloomy days of early 2009, when Galaxy decided to mothball its part-built Cotai resort because of concerns about the risk of a quarter billion US dollar funding shortfall. It’s also a long way from the days back in 2002 when Las Vegas Sands Corp got cold feet at a Macau joint venture with the untried (in gaming management terms) GEG executive team, opting instead to work on its own via a sub- concession from GEG’s licence. We’ll leave it to readers to decide who did best out of that arrangement. So far in the latter part of 2011, Sheldon Adelson and his company have been making headlines for the right reasons. As the only casino operator with a presence in the world’s two most lucrative casino gaming markets—Macau and Singapore— the future looks a lot brighter for Las Vegas Sands Corp than it did during the financial crisis of 2008. Back then, its auditors were required to issue a formal warning about the possibility of the highly-leveraged company going out of business. If 2010 was also something of an annus horribilis for LVS as far as Macau was concerned—with the announcement of multiple US federal investigations into Sands China’s business and a Hong Kong Stock Exchange probe thrown in for good measure—then the turn of the year wasn’t that great either. In late December, the Macau government rejected an application by Sands China Ltd, the Hong Kong-listed unit of LVS, for rights to a piece land on Cotai previously earmarked for expansion of LVS’s Macau business and known as ‘Plots 7 and 8’. There was better news in June this year when Sands China said it had secured new US$3.5 billion five-year bank loans and that it had the option to raise another US$1 billion of financing. LVS says the new bank loans will help the company to reduce its interest expense significantly and extend its debt maturities to 2016. LVS previously purchased some relatively expensive debt in the aftermath of the financial crisis for the completion of its US$4.2 billion Cotai plots 5 and 6 (now known as Sands Cotai Central). The new loans may also give the company more wiggle room should it wish at some point to restructure debt still due on its US$2.4 billion Venetian Macao and the US$1.07 billion Four Seasons Macao next door. The company said in its second quarter results for 2011 that interest expense, net of amounts capitalised, was US$70.6 million for the second quarter of 2011, compared to US$77.0 million during the second quarter of 2010. Perhaps the brightest point of 2011 so far was news that the first phase of Sands Cotai Central could open its doors “early next spring,” in the words of Mr Adelson in a press announcement in early August. He didn’t provide details on the number of gaming tables, slots and hotel rooms that would be release to the market in that first phase. The topic of new tables is a sensitive issue, given that the Macau government has imposed a cap of 5,500 tables on the market between now and the start of 2013, and Macau’s current inventory stood at 5,237 tables at the end of June, according to Macau’s gaming regulator the DICJ. Sands Cotai Central has previously missed a series of company-imposed deadlines for completion—due to a range of circumstances including many beyond LVS’s control such as global recession and Macau’s labour shortages. Investors will therefore 2 (1) Sheldon G. Adelson Chairman and CEO Las Vegas Sands Corp