Galaxy Entertainment Group may need to suspend construction of its flagship Cotai resort if it faces a funding gap as predicted, says Deutsche Bank analyst Karen Tang. This is despite the company’s plans to buy back significant portions of its existing debt at around half price. The closing date for the buy back offer is 29th December.
“If Galaxy is successful in repurchasing a significant amount of its outstanding debt, the reduced cash position further reinforces our view that Galaxy will need to go back to the market to raise new financing to close the funding shortfall,” says Ms Tang in her report on the economic outlook for Macau in 2009.
“Given prevailing market conditions, it in unlikely that the company will successfully raise the required funds, in our view. Hence, we continue to attribute zero value to the GalaxyWorld Resort as we believe Galaxy may have to suspend construction in Cotai,” she adds.
Galaxy will be keen to avoid any such suspension of construction work. Galaxy executives saw what Las Vegas Sands Corp.’s mothballing of its new Cotai sites did to long-term investor confidence, even if in the short term it helped to support LVS’s share price.
AGI approached Galaxy for a response to the DB report, but the company had made no comment by the time we went to press.
In early December, Galaxy announced a USD180 million buy back offer for USD350 million face values of its fixed and floating rate bonds. Deutsche Bank estimates that if half of all the bondholders accept the offer it will save Galaxy HKD128 million per year in interest charges.
Galaxy has a pressing need to put its balance sheet in order. It still reportedly has to fork out HKD7.8 billion to finish GalaxyWorld Resort (aka Galaxy Mega Resort, aka Galaxy Macau) on Cotai. Recently it announced the opening date for the first phase of the project had been put back from the third quarter of 2009 to 2010.
Macquarie Securities said the buy-back would reduce Galaxy’s annual interest payments by about HKD400 million.
Moody’s Investors Service also thinks Galaxy will still have to raise additional financing to cover a short fall in cash generation arising from the delay to its Cotai resort.
Analysts say Galaxy also has a USD250 million-debt note that matures in December 2010. The South China Morning Post reported recently that this too would be the subject of a reduced payment offer to creditors.
Galaxy is reportedly offering bondholders 53 cents on the dollar for the Singapore-listed note issued in 2005 and due in December 2010.
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