The combined net debt of Macau’s concessionaires could be reduced back to pre-COVID levels in three years, with the pace of deleveraging likely to accelerate in the second half of 2023, according to investment bank Morgan Stanley.
In a recent note, analysts Praveen Choudhary, Gareth Leung, Stephen Grambling and Nicholas DeValeria said net debt for the Macau gaming industry had risen by around US$17 billion to well over US$20 billion since the end of 2019, however concessionaires have reduced this debt by US$1.7 billion over the last six months, suggesting an annualized rate of US$3.4 billion at current levels.
More importantly, “the pace of deleverage could pick up from 2H23 as business volumes continue to ramp.”
“It could take the industry roughly three years to delever and get back to 2019 net debt levels, based on US$6 billion annual FCF (free cash flow),” or around US$9 billion in EBITDA, they wrote.
The risk to this timeline is the non-gaming commitments of each concessionaire, which Morgan Stanley says could slow down deleveraging.
“Non-gaming commitment is not free and is cash outflow,” the analysts explained. “We estimate the average yearly spend (over 10 years) to be 20% of [estimated] 2024 EBITDA.”
Looking at each company’s net debt/EBITDA, SJM is the most leveraged at 9x based on estimated on 3Q23 EBITDA) while Wynn and Melco are between 5x and 6x, and Sands and MGM between 3x and 4x, the analysts said. Galaxy Entertainment Group has a net cash position of -2x.
“To understand which company could be stressed, one can also look at net debt/market cap and EBITDA coverage of interest expense,” they continued.
“In terms of debt as a percentage of market cap, Melco is the worst positioned at 131%, while Wynn and SJM are at 101%. EBITDA coverage is much more comfortable for all, with the lowest being 2.5x for Wynn, Melco and SJM. “
MGM gearing, Morgan Stanley noted, “seems much better than at SJM, Melco and Wynn, with MGM’s debt position to be aided by the addition of 200 new gaming tables.
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