US-based Macau gaming companies only would lose their gaming licenses in ‘worst-case scenario’: Fitch

‘Termination or non-renewal’ of US-backed Macau gaming companies’ licenses ‘would be a worst-case scenario,’ which analysts at Fitch say is ‘highly unlikely’.

In a Thursday note, Fitch Ratings projected one possible scenario in which US operators are ‘compelled to sell their Macau operations’. The analysts say this ‘could become more plausible if US-China relations deteriorate further in the medium term but that is not envisaged in the forecast horizon’.

Sands China, MGM China and Wynn Macau are understandably calculating the odds of retaliation over the backwards and forwards tariff impositions brought about by the administration of US President Donald Trump.

However, the term of the Trump presidency ends in 2029 (barring a rewrite of the US Constitution), while Macau’s 10-year gaming licenses extend on until 2032.

Given that taxes on gaming revenues provide around 80 percent of Macau’s total tax revenue, aside from employing tens of thousands directly and indirectly, it would not be in best interest of the SAR to let the US-China trade dispute bleed into its own politics.

Plus, all six of the gaming operators in Macau have pledged to develop non-gaming in the city. Data from Jefferies indicate that Sands China’s non-gaming pledge amounts to $416.48 million per year in non-gaming spend, with that of MGM China totaling $224.72 million and Wynn Macau amounting to $210.11 million per year. That’s just under the concession commitment.

Other ways to retaliate

Fitch notes that in previous diplomatic disputes, ‘China has targeted foreign companies […] and these actions typically involved increased regulatory scrutiny rather than outright bans’. Macau also has its own judicial and legal system largely separated from China, meaning it would have to pass its own laws or administrative regulations to punish US gaming operators if it thought such a move necessary.

Another possibility outlined by the analysts is a consumer boycott, however, given the relative stability in gaming revenues after the tariffs were announced, it appears that consumer sentiment has been largely unaffected. Punters choose where to play based on comfort, access and credit lines rather than politics. Even if such a boycott were to occur, the analysts indicate that historically ‘they tend to be short-lived’.

But Fitch notes that fluctuation in Macau would definitely hurt the operators’ bottom line, with Las Vegas Sands deriving 63 percent of consolidated FY24 revenues from Macau, which drops to 52 percent for Wynn Resorts and 23 percent for MGM Resorts International.

How to mitigate the risks

Although US gaming operators ‘could be subject to retaliation’, the more concerning aspect is that ‘the weaker economic outlook in China is likely to pressure gaming revenues and earnings in Macau’.

But strong balance sheets from the operators could help ‘mitigate some of these risks’. Also, the way that finances are structured, with Macau operations being owned via non-wholly owned subsidiaries listed on the Hong Kong Stock Exchange, ‘legal ringfencing separates the Macau operations from the US-based entities’.

‘The US entities and international subsidiaries have separate debt issuances with outstanding balances roughly proportionate to EBITDA generation, and there are no guarantees between parents and subsidiaries’.

Looking per company, Fitch highlights that ‘LVS has ample rating headroom at current levels’ and ‘liquidity is abundant’. MGM and Wynn ‘also have adequate rating headroom at current levels’.