For the time being, VIP credit risk appears to be a micro, not so much macro, issue in Macau
Rumours last month that a Macau casino operator may be in the hole for HK$100 million because of liquidity issues faced by a junket over player bad debt is tending to provoke one of two responses in town:
a) concern
b) surprise that it wasn’t more money and more than one junket
Although it is likely a similar scenario has played out at other casinos around town, even a few hundred million HK dollars of uncollectibles would only represent a fraction of one percent of total VIP revenue, and it still premature to presage the reemergence of a bad debt crisis.
Still, with Macau VIP gross revenue growing by 62% year on year in the fourth quarter of 2010 and fierce competition in the segment by casinos and junkets for players via the mechanism of profit share, it’s difficult to see how every dollar of credit issued to players could be copper bottomed.
Similar dynamics—rapid VIP segment growth and fierce competition on commission rates—were in play the last time there were significant bad debt issues in the Macau high roller market. That followed the market busting 1.35% rolling chip commission offered by Crown Macau (now Altira) in December 2007 in an attempt to grab a large share of the VIP market quickly.
Without pointing any fingers, it’s interesting to note that some of the same personalities that were involved in that competition war have also been linked with the new one.
JPMorgan told Dow Jones Newswires last month that market concerns about the potential negative impact on Macau, and especially its VIP segment, from credit tightening in the general economy of mainland China are overdone.
That may be right in terms of the feeder system to the Macau high roller market. The lending policies of Chinese retail and merchant banks as dictated by China’s central bank are one thing. But the lending policies of Macau junkets to people who rock up in the territory (claiming they have the liquidity already) are quite another.
The need for junkets to preserve their liquidity and profit margins are certainly powerful market-driven mechanisms for imposing credit discipline. But it only takes one or two casinos with a higher appetite for risk than the average—possibly due to internal pressures linked to stock price or balance sheet issues—and an eager and ambitious junket operator willing to serve that higher risk appetite (in order to get potentially above market average profits), for that market discipline on credit issuance to unravel. This vicious circle is made potentially more vicious because of the fact that listed casino operators don’t immediately have to justify high risk Macau lending policies to their shareholders because usually they’re not the ones doing the credit issuance. When it goes right, management in the individual property claim the success. When it doesn’t, they blame the junkets.
An important question is would any disorder in the Macau VIP credit market lead to a fall in the growth rate of the sector, or discourage high rollers from visiting Macau? The answer from the time of the previous spike in bad credit in the first half of 2008 is ‘probably not’.
But the last round of credit default did attract the attention of the central government in Beijing, and that in turn may have contributed to the restrictions on inward visas for PRC citizens seen in 2008 and through into early 2009.
While we’re on the subject of VIP profit share, a Macau insider has helpfully pointed out to Inside Asian Gaming that there is a significant opportunity cost associated with it. The clue is in the name of the business model—”profit share”. Junkets (and casinos) pay corporate tax on anything called ‘profit’.
Under the longer-established rolling chip commission model, junkets don’t pay tax on junket losses (including bad debt). Casinos, however, must pay their 39% gaming tax on any gross revenue recorded regardless of whether it’s funded by debt that subsequently goes bad. That’s where any disorder in the VIP market could really hurt the balance sheet.
