Wynn Resorts (NASDAQ:WYNN) has to be concerned that Studio City, which opened its doors in October 2015, may default on its bonds. Wynn just opened its $4.2 billion Palace casino on the Cotai Strip last Monday, and the lackluster reception the competition has received in its first year of operations has raised some doubts for the entire region.
Your word is your bond
Last week, Bloomberg News reported that bonds issued by Studio City to construct the casino were in distress after S&P Global Ratings lowered its outlook to "negative" for the project. Revenues have been weak, and doubts regarding its ability to refinance have surfaced.
The Studio City resort, part of Melco Crown Entertainment (NASDAQ:MPEL), was built in response to an edict from Beijing to de-emphasize gambling in Macau -- one of the few places in China where it is legal to do so -- in favor of other attractions and entertainment with greater mass-market appeal. While gambling is still front and center at Studio City, the resort also features a Batman 4D flight-simulator roller coaster, a figure-eight Ferris wheel, a three-theater House of Magic, and more.
lf you build it, they will come
Cotai is under the gun to become an entertainment and leisure center as part of a five-year plan to model the strip after Las Vegas. The plan grew out of a government campaign against luxury and gift giving that resulted in a crackdown on corruption and close monitoring of money transferred between the mainland and Macau. VIP gamblers who once flew to the island regularly to drop large bets at high-roller tables began looking elsewhere.
Gaming revenue in Macau has fallen for 26 straight months, and casino operators have been looking to mass market segment in hopes of reversing the trend. With all that in mind, Studio City's lackluster results are likely generating some angst among other players in the region.
Earlier this month, Melco Crown released its second-quarter results -- Studio City generated just $184 million in net revenue for the period, its second disappointing quarter. Mass-market table game drop at its City of Dreams casino was also down, falling 14% to just over $1 billion, while game drop at Altira Macau was down 25%.
A portent of things to come
To make matters worse, Wynn Palace opened recently after being granted less than half of the table games Melco Crown was awarded for Studio City, forcing the company to shuffle tables from Wynn Macau to make the new property viable. Next month, Las Vegas Sands (NYSE:LVS) will be opening its Parisian resort on the Cotai Strip, only to be followed in the second quarter of 2017 by MGM Resorts' (NYSE: MGM) new venue, MGM Cotai. That project has been delayed several times already.
Melco Crown insists there is nothing to worry about at Studio City -- the construction of the Parisian and a light rail system to bring tourists to Cotai were the main problems impacting visits to the casino. But radio and TV network Teledifusao De Macau reports visitors to the island fell 2.6% last year to 30.7 million, and across the first six months of this year, the number of tourists has remained flat.
That could be prove to be a troubling development if the new properties come online only to be met by stagnant or negative visitor growth. This trend is partially behind the negative outlook from S&P for Studio City bonds due in 2020, as the company could breach its $1.4 billion senior credit facilities. Separately, 10.625% notes from two U.S. hedge funds were considered distressed as they were trading at about $0.40 on the dollar.
Melco Crown Entertainment may be correct that because the bonds are all non-recourse to the casino operator, it has no liability and does not need to assist Studio City financially. But that likely offers little comfort to Wynn and Adelson, who are looking at the bigger picture and what a default could signal for their own openings.