Macau gaming bonds remain a top choice for Asia credit investors, despite the fact that the recovery has already largely taken place, according to HSBC.
According to a recent report from the HSBC credit research team, given the supportive fundamentals and a scarcity of new papers in the Asia HY universe, it’s not surprising that the Macau gaming sector continues to be highly attractive to Asia credit investors.
Analysts are mindful of the increasing pushback from investors regarding adding to positions at the current valuation. This comes after Macau gaming bonds delivered a robust average return of 8 percent in November and December 2023, fueled by strong macro tailwinds and higher-than-expected Macau full-year gross gaming revenue.
In their investment memo, the credit research team notes that while most Asia credit investors recognize that the theoretical upside of Macau gaming bonds from a cash flow recovery has largely played out, they also anticipate limited downside risk in gaming operators’ fundamentals for this year.
The market sentiment aligns with HSBC analysts who state: ‘We believe this is a good time for investors to increase exposure to the weaker links in the sector, i.e., Studio City and SJM Holdings, which still offer decent all-in yields in certain parts of their curves compared to their peers.’ This was mentioned in a Monday note.
Lagging EBITDA recoveries
Heavy debt has resulted in both SJM Holdings and Studio City having a prolonged path to deleverage, leading to a slower recovery compared to their peers.
HSBC notes general market concerns about these two operators, stemming from lagging EBITDA recoveries (at a low 60 percent in 3Q23) compared to peers (at least mid-80 percent in 3Q23, except for Melco Resorts) and weaker liquidity positions.
However, analysts confirm that they do not foresee “additional risks” for Studio City and SJM Holdings associated with these concerns in the short term. Their cash flow continues to recover, and there is light near-term refinancing pressure, with only $244 million in loan amortization to be repaid by SJM Holdings. This amount can be sufficiently covered by the $583 million cash position as of the end of September 2023.
Analysts also reiterate a “Neutral” fundamental recommendation for Studio City and SJM Holdings. With their continual fundamental improvement and the expectation of more active deleveraging processes from these two companies, credit metrics should be enhanced.
At the same time, they note that key upside risks include a stronger-than-expected recovery in the liquidity position and active liability management. Key downside risks include keener competition among gaming operators, making it more challenging for them to gain market share.
No dividend payment in the near term
The research team believes there is little possibility for Sands China and Wynn Macau to resume dividend payments in the near term, as the deleveraging process appears to be a priority for gaming companies.
Currently, there is a fairly wide yield premium on Macau gaming bonds compared to their US parents’ bonds. HSBC points out that at the current valuations, it seems that the market has not yet priced in the narrowing liquidity difference between parents and subsidiaries now that Macau operators are back to being sizable revenue generators for their US parent groups.
Last May, Sands China agreed to an 18-month extension of a dividend-restriction period as part of an amended and restated facility agreement worth approximately $2.49 billion.
Under the latest amendment, the extending lenders’ Hong Kong dollar-denominated commitments total just over HK$17.6 billion ($2.25 billion), while the US dollar-denominated commitments total $237 million.
The amended deal took effect on July 31st of last year, and the termination date on the facility agreement under the latest amendment has been moved from July 31st, 2023, to July 31st, 2025.
