\n(Bloomberg) \u2014 Macau casino bonds are plunging as President Xi Jinping\u2019s corruption crackdown against \u201cflies and tigers\u201d spooks VIP gamblers.<\/p>\n
\tThe yield on Wynn Macau Ltd.\u2019s notes due October 2021 jumped 86 basis points this month and touched a record 5.73 percent on Sept. 25, data compiled by Bloomberg show. The yield on Melco Crown Entertainment Ltd.\u2019s debt due 2021 rose to an all-time high of 5.56 percent last week. The six biggest Hong Kong-listed Macau casino stocks have plummeted 32 percent on average this year.<\/p>\n
\tGross gaming revenue in Macau, the only place in China where casinos are legal, may fall this year for the first time since data dating back to 2002, amid Xi\u2019s anti-graft campaign, slowing economic growth and protests by croupiers for higher wages. Tour operators are offering private jets to fly China\u2019s high-spending gamblers, or VIPs, to Melbourne and Las Vegas so that they can avoid the increased scrutiny in Macau.<\/p>\n
\t\u201cThere\u2019s a critical mass of headwinds without even getting into the \u2019China is slowing\u2019 dynamic,\u201d said Kevin McSweeney, a Toronto-based fund manager at CI Investments Inc., which oversees an equivalent of $90 billion of assets. \u201cInvestors have found more reasons to sell than to buy right now.\u201d<\/p>\n
\tGrowth Prospect<\/p>\n
\tPresident Xi\u2019s probes are targeting Communist Party cadres from the top to bottom ranks nationwide as he warned that the 87 million-member strong party is facing \u201csevere dangers\u201d from corruption. Liu Tienan, the former deputy head of the National Development and Reform Commission, is the latest high-ranking official facing trial on bribery charges.<\/p>\n
\tXi\u2019s top-to-bottom approach has sent chills through the economy. An index tracking prices of the world\u2019s 100 most sought-after fine wines touched the lowest since 2009 in July. Retail sales rose 11.9 percent in August from a year earlier, below the average 15.8 percent over the past five years. A Purchasing Managers\u2019 Index for manufacturing was probably 51 in September, a second straight month of slowdown, according to a Bloomberg survey of economists before official data due Oct. 1.<\/p>\n
\tBarclays Plc cut its estimate for 2014 expansion in the world\u2019s second-largest economy to 7.2 percent from 7.4 percent this month, while Nomura Holdings Inc. also lowered its estimate to 7.2 percent. The yield on the 10-year government bond fell 24 basis points this month to 4 percent last week. The yuan has gained 0.3 percent, its slowest advance in four months.<\/p>\n
\tFirst Drop<\/p>\n
\tGross gaming revenues will probably drop 1 percent this year, compared with an earlier prediction for 5 percent growth, CLSA Ltd. analysts led by Aaron Fischer wrote in a Sept. 24 note. They also cut the 2015 growth estimate to 5 percent from 10 percent, compared with an average of 30 percent in the past 10 years.<\/p>\n
\tVIP guest numbers are unlikely to turn around soon as customers are concerned about the anti-corruption drive, Bank of America Merrill Lynch analysts led by Billy Ng wrote in a note this month. Macau banned jewelry and watch retailers operating in casinos from adding new card devices starting in July, Francis Tam, the city\u2019s secretary for economy and finance, said on June 26. That had made it harder for gamblers to buy expensive goods in exchange for cash.<\/p>\n
\t\u201cThe sustained slowdown in gross gaming revenue now looks more prolonged in investors\u2019 minds,\u201d said Edmund Harriss, investment director in London at Guinness Atkinson Asset Management LLC, which oversaw more than $1 billion in assets as of the end of August. \u201cMacau is dependent upon the Chinese market and the clampdown looks to be more sustained and thus has a high impact on Macau revenues.\u201d<\/p>\n
\tValuation Issue<\/p>\n
\tOver 1,000 casino workers took to the streets on Aug. 25 for a seventh time this year to demand better pay and working conditions, the largest demonstration by industry employees so far in 2014. Macau Gaming Industry Frontline Workers\u2019 union is planning more protests including China\u2019s week-long National Day public holiday, which starts from Oct. 1.<\/p>\n
\tMacau casinos \u201cwill stabilize\u201d as the Chinese special administration region\u2019s chief executive Fernando Chui begins his second five-year term in office, Wynn Resorts Ltd. Chairman Steve Wynn told reporters in Macau on Sept. 23. Wynn Macau has also had \u201cno problems\u201d in filling casino jobs with locals and non-local employees, the billionaire said.<\/p>\n
\tThe yield on Wynn Macau\u2019s bonds due 2021 was at 5.73 percent on Sept. 25, 64 basis points above the average 5.09 percent since its October 2013 debut, data compiled by Bloomberg show. The rate on Melco Crown\u2019s debt due 2021 was 50 basis points above its average in the past year. The average rate on Asian high-yield corporate dollar bonds is 7.3 percent, according to a Bank of America Merrill Lynch index.<\/p>\n
\t\u201cRisk of default isn\u2019t the issue,\u201d said Harriss. \u201cPerhaps it\u2019s just one of valuation.\u201d<\/p>\n
\tWorkers\u2019 Strike<\/p>\n
\tShares of Galaxy Entertainment Group Ltd., the casino operator founded by billionaire Lui Che-woo, have tumbled 31 percent since the end of last year. SJM Holdings Ltd., chaired by another billionaire Stanley Ho, fell 39 percent this year, the most among the six-largest Macau casino operators listed in Hong Kong.<\/p>\n
\tGalaxy Entertainment had a total debt-to-asset ratio of 1.39 percent, lower than the global industry average of 26.8 percent, according to data compiled by Bloomberg. SJM\u2019s ratio is at 5.45 percent, while those of Wynn Macau and Melco Crown are 37.8 percent and 31.9 percent, respectively.<\/p>\n
\tSome of the Macau casino bonds \u201cstill represent solid fundamental values,\u201d said IC Investment\u2019s McSweeney. \u201cDefault risk is low, debts are manageable in the context of the underlying companies\u2019 cash flows, and the secular growth story should return. For now, however, this is not the story.\u201d<\/p>\n
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