Caution: downgrade possible

In May, when it upgraded Macau to its third highest rating level above China and Japan, Moody’s said its main concern was the slowdown of the mainland economy, never referring to a possible gaming crisis here. The remarks were made despite signs that the current record plunge of revenues, profits and stocks of casinos here was already germinating under investors’ noses. That month, gaming revenue growth was already slowing for three straight months, with June marking the first year-on-year decline in years. A downgrade ‘was very unlikely’, wrote the company at the time.
Now, Moody’s tone has changed. This month, the world‘s second biggest credit agency sent several warnings to Macau officials and gaming operators. The agency yesterday said that the decline in gaming revenues here was credit negative for the government. Which means a downgrade in the upcoming three months is likely. With seven straight months of declining casino revenues – with a record 30 per cent drop in December, and a recovery only expected in summer – Moody’s analysts are getting less optimistic about the secular success story of Macau.
If, in May, Moody’s underlined the excessive dependency on China as the main risk for a downgrade, now it’s the casinos’ turn. The gaming industry represents half of Macau’s economy and 80 per cent of its taxes compared to 50 per cent in 2002. Since that year, Moody’s has upgraded Macau four times, giving the territory a Aa2 grade, the third highest, with the city being considered a ‘high quality and subject to very low credit risk’ investment, according to the company’s website. Macau sits one notch behind Hong Kong and above China and Japan, the two biggest economic powerhouses in Asia.

Safety net

For now, what keeps Macau high on credit agencies’ rankings is its safety net. The Government has in its coffers MOP393 billion in ‘savings’, around 95 per cent of the territory’s GDP and more money than 100 nations around the world.
This amount of capital protects Macau. Moody’s said: ‘If there were to be an unforeseen shock that caused revenues to fall drastically, the government would be able to finance itself without relying on borrowing for some time to come due to the size of its assets’.
But if the Government has its own safety net gaming operators don’t. Last week, Moody’s warned Melco Crown Entertainment that the slump in gaming revenues in Macau will have negative implications on its ratings. ‘Declining gaming revenue will weaken the companies’ revenue and profit generation, which in turn diminishes their debt-servicing capacity’, Moody’s wrote.
Despite the warning, the agency has maintained its Ba3 rating for the operator owned by Australian mogul James Packer and Lawrence Ho. If casino revenues keep declining or the recovery expected for this year fails to materialise, Melco Crown will face a new wave of rating downgrades.
Melco Crown unveiled two days ago its new mega project here called Studio City. The US$3.2 billion integrated resort will provide 1,600 rooms, 500 gaming tables, a Batman Gotham City park and the highest ferris wheel in Asia.