By Muhammad Cohen | Editor at large
Muhammad Cohen also blogs for Forbes on gaming throughout Asia and wrote Hong Kong On Air, a novel set during the 1997 handover about TV news, love, betrayal, high finance and cheap lingerie.
After grabbing headlines with more VIP action than Venetian Macao, Imperial Pacific International’s (IPI) casino on remote Saipan is making less welcome news lately. A former employee says the casino facilitated money laundering. Ratings agencies downgraded IPI’s creditworthiness as it tries to fill an estimated quarter billion dollar funding gap for its US$600 million Imperial Pacific casino hotel. US authorities issued a warrant to investigate the hotel construction site following a reported worker death and protests over unpaid wages.
As China’s crackdown on overseas fund transfers threatens VIP play globally, Saipan could become a focal point as a US territory where the casino is run by a company with ties to the new American president who has repeatedly denounced China and key planks in the Sino-American relationship.
Amid this tumult, or perhaps because of it, CEO Mark Brown says he is vacating the post at Imperial Pacific’s Best Sunshine International unit in Saipan to become IPI’s Chairman. Mr Brown told Inside Asian Gaming that IPI would confirm the change in a Hong Kong stock market filing which hadn’t happened by time of publication. A second source confirmed Mr Brown’s departure as CEO to become IPI’s non-executive chairman.
Mr Brown, former President and CEO of Trump Hotels and Casino Resorts in Atlantic City who has cited Donald Trump as a mentor, joined Best Sunshine in November 2014 and took the company from a US$7 billion investment plan that seemed pure fantasy to a 365 room beachfront casino hotel under construction, exclusive negotiations with the government on a multiple resort site and “temporary casino” Best Sunshine Live, a real money training facility formally launched in November 2015. Best Sunshine Live boasts with 48 tables – a third of them for VIPs – and 144 machines, reporting US$32.4 billion in VIP volume for 2016 under the first Macau style rolling chip program on US soil.
As part of “structuring the company to be more efficient,” Mr Brown told the Marianas Variety newspaper that Kwong Yiu-ling, Best Sunshine’s Chief Operating Officer since November 2015, will be its new CEO. A 40 year industry veteran, Mr Kwong worked for Stanley Ho’s SJM Holdings and its predecessor STDM for three decades, then became COO at Melco Crown’s Altira Macau and later MGM Macau’s Executive Vice President of casino operations.
A Macau contemporary calls Mr Kwong an “old school” casino executive, and another insider believes his Chinese language fluency could increase the comfort level of Ji Xiaobo, IPI’s driving force, who doesn’t speak English.
FAMILY AFFAIR
Saipan’s extraordinary rolling chip volume – which saw its 16 tables surpass the roll at Venetian Macao’s 100-plus VIP tables for the second and third quarters last year – stems from IPI’s links to Macau’s junket business. Mr Ji, 38, the project’s “mastermind,” according to an IPI lawyer, is a former Hengsheng Group figure; insiders disagree on his role. His aunt, Cui Limei, is the registered owner of Hengsheng’s Macau branch. His mother, Cui Lijie, holds some 93 billion IPI shares and options, equal to 65% of outstanding shares and valued at more than US$1 billion. Mr Ji owns 71.5 million shares and holds rights to 128 billion shares through a convertible bond issue.
When the family took over then-First Natural Foods Holdings in late 2013 as parallel efforts to legalize casinos in Saipan and win the license began (the name change to Imperial Pacific International happened in 2014) many characterized it as a backdoor listing of Hengsheng. IPI had a profit sharing deal with Hengsheng that it voided in 2015 as Macau’s VIP revenue imploded amid Chinese President Xi Jinping’s corruption crackdown that had high rollers shunning Macau.
“Saipan offered the advantage of being well away from the intrusive oversight that was being applied by the PRC government to high rollers,” Newpage Consulting Principal David Green, a former gaming regulator in Australia, observes. It also offered commissions up to 1.4%, compared with 1.25% in Macau, and recently received authorization to raise commissions to 1.8%.
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Saipan has other charms, starting with visa-free entry for mainland Chinese visitors, a remnant of CNMI’s formerly independent immigration and customs that, along with previously autonomous labor rules, made it a center for sweatshops producing garments with “Made in USA” labels.
Of last year’s estimated 500,000 visitors, 40% were from China, with a similar number from South Korea and about 15% from Japan, once CNMI’s market leader. Saipan may be more than four hours by air from any significant population center, but for much of China (and Japan and Korea), it’s closer than Singapore or tropical beach destinations such as Bali or Phuket.
AMERICAN IDYLL
Roughly 1.5 times the size of Macau, Saipan has clean air and clear water, plus a unique combination of tropical activities from surfing to golf, World War II historic sites, Pacific island culture and retro American beach town charm. The US connection is a key selling point for Chinese tourists, especially high rollers.
“Saipan is part of the USA, with good laws and regulation of a USA standard,” Macau Gaming Information Association Chairman Charlie Choi said after visiting with a delegation from the junket trade group that included promoters and VIPs. “Clients feel safe and confident about the fairness and integrity of the game and casino operation.”
With just 2,900 hotel rooms in Saipan and expanding direct flights, lodging is a potential bottleneck. The best thing IPI could do for CNMI and itself would be securing funds to complete Imperial Pacific resort in Saipan’s tourism hub, Garapan, initially slated to open before Chinese New Year.
Last September, IPI announced a US$400 million bond issue for the project, until recently known as Grand Mariana. In an October interview, Mr Brown mentioned potential bond deals with Credit Suisse, an initial book builder along with SC Lowy and Jefferies, Morgan Stanley and Deutsche Bank. But two days before Christmas, Bloomberg reported the bond offering was on hold after buyers balked despite interest rates reportedly as high as 11%. The article claimed two of three bond offering managers dropped out after a visit to Saipan raised doubts that IPI’s sweetheart deal, including a 40 year exclusive casino license with no gaming tax, will remain intact.
On December 30, IPI issued a statement claiming, “certain series of media reports have portrayed an inaccurate view of the current affairs of our company.” Calling the unspecified allegations “false,” the statement declared the Saipan project, “ïs based upon a cooperation agreement between the company and local government and is fully protected by the laws.” The December 30 statement also said that company and lawyers, “have made serious consideration in matters about raising funds through other channels” and in January filed for a new bond issue of at least US$60 million at 8.5% interest to complete a “soft opening” of Imperial Pacific resort, meaning it would open the casino, while looking for additional funding to complete the hotel.
DOWNGRADED
Fitch Ratings and Moody’s Investor Services rated these prospective bonds below investment grade. Each ratings agency also downgraded IPI’s overall creditworthiness, in part due to its difficulties finishing the casino hotel, limiting cash flow and threatening cost overruns as the opening date, now March, is delayed.
“Operating cash generation is likely to be low, despite strong revenue growth,” Fitch wrote. In other words, for all its gaudy VIP numbers, IPI isn’t making much money. In August, IPI took a HK$492 million (US$63 million) loan from its controlling shareholder.
Fitch cited concerns over IPI’s reliance on the “volatile” VIP segment that’s low margin, reliant on junkets and “subject to policy uncertainty.” Its report specifically noted that CNMI’s Commonwealth Casino Commission had approved just one of 18 junket applications in a year, leading to IPI granting credit directly to VIP customers, a risky proposition.
For the six months ended 30 June, IPI reported outstanding receivables, due in 30 to 180 days, of US$509 million, compared with US$513 million in revenue. With a US$37 million bad debt provision and US$145 million in guarantee deposits in hand, IPI had net exposure of US$326 million, twice reported EBITDA of $160 million. Fitch believes IPI receivables have increased along with VIP revenue and have an average age over 100 days.
A soft opening of an expanded gaming floor with 200 tables and 400 machines might change the revenue mix, which saw 96% from the VIP segment in the first half of 2016. In addition to its 365 guest rooms, Imperial Pacific promises world class F&B in partnership with Michelin star chef and restauranteur Brian McKenna, featuring five Michelin star chefs in its 11 restaurants, four bars, a night club and beach club. IPI also plans to promote Saipan as a wedding destination.
Along with the hotel’s financing issues, there are also concerns about the job site. The US Labor Department obtained a legal warrant to inspect the site citing worker safety concerns, while workers from China protested over unpaid wages.
“The protest involves a dispute between Sino Great Wall International (CNMI) Co. LLC and its employees,” IPI wrote after workers demonstrated on 16 December. “The dispute does not involve IPI. IPI reassures the CNMI that the ongoing construction of its multimillion dollar facility is not affected and will continue as scheduled. IPI is hopeful that the parties will resolve the dispute amicably and in a timely manner.”
IPI’s 30 December statement declared, “The company has fully foreseen and prepared for the legal issues encountered in overseas investment projects and the disputes arising form local partners and labour [sic], and has set up a professional legal team to assist the
Company to handle.”
The statement reiterated that IPI “is now in full swing in construction of this large-scale integrated resort,” an assertion repeated in a Hong Kong stock exchange filing in January.
More US government agencies could come calling. A wrongful dismissal lawsuit filed in December by former Vice President for Tables Games Danny Ewing alleges, “Imperial Pacific failed to implement or enforce an adequate” anti-money laundering program. Specific charges include allowing a US$400,000 deposit without required customer identification and advising patrons on “structuring” to avoid reporting requirements on transactions above US$10,000. Best Sunshine didn’t respond to questions about the suit.
“CNMI is a young destination,” Boies, Schiller and Flexner Partner Scott Wilson says. “Sometimes in that situation there may be oversight failures. The scale or sophistication of the business may outpace the capacity of the regulator.”
“A civil lawsuit is not a trigger for a regulator to act,” Spectrum Gaming Managing Director Fred Gushin, formerly an adviser to the gaming commission in Tinian, another CNMI island, and attorney with the New Jersey Division of Gaming Enforcement, says. But he has no doubt that the US Banking Secrecy Act and other anti-money laundering statutes apply in CNMI, affirmed by a record US$75 million fine for money laundering violations at the Tinian Dynasty casino – and a 2015 federal court ruling upholding the fine – though the case was eventually settled for a US$3 million forfeiture.
The authorities posing the greatest danger to IPI may not be American but Chinese. Beijing’s anti-corruption crackdown has expanded to combating underground money transfers essential to mainland Chinese VIP players. IPI’s reliance on high rollers puts it on a collision course with Beijing.
Then there’s the Trump factor. From Beijing’s perspective, with Trump alumnus Mr Brown plus former Trump campaign adviser and US CIA Director James Woolsey as a director, IPI was a company on US soil, close to the new President, ignoring its own rules to help Chinese citizens break Chinese law. That may have put a target on IPI and could even become an issue in the US-China relationship. But most importantly, it underscores that IPI needs a new game plan.
All these negatives shouldn’t obscure Saipan’s potential.
“Saipan will never be Macau,” Global Marketing Advisors Senior Partner Andrew Klebanow says. “It will not be a leading international gaming destination, but it can be a successful regional destination that serves several unique markets, in particular, Korea, Japan and China. It is a lovely place to visit.”
