China's gambling capital, Macao, is on track to report its first year-over-year decline in gaming revenue in three years. China's crackdown on money flows in and out of the peninsula, a slowing economy, and the trade war with the U.S. are taking their toll.

Next year isn't looking very optimistic, either, as neighboring Asian countries like Vietnam lure in more gamblers, and further-out Japan promises to build up a casino industry that could eventually rival Macao.

Stacks of $100 bills

Image source: Getty Images.

Yet last week the Macao subsidiary of Wynn Resorts (NASDAQ:WYNN) raised $1 billion in senior notes due in 2029, a seemingly dicey undertaking considering the relicensing procedure that's due to begin in 2022, though it's likely only a remote possibility it won't have its concession renewed.

But third-quarter revenue was down over 18% at both its Wynn Macau and Wynn Palace integrated resorts, causing the casino operator to report a 21% decline in adjusted earnings and a net loss of $3.5 million. Is now really the right time to be taking on more debt?

No time like the present

The short answer is yes, but it's still a little more complicated than that because the market is undergoing a shift and Wynn could be one of the casinos most impacted.

Wynn will be using the proceeds of the debt offering to pay off a portion of its existing higher interest rate debt. The swap helps it lower its interest expense on the $4.1 billion in debt Wynn Macau carried at the end of the third quarter.

However, because Macao represents almost 68% of Wynn's operating revenue and over three-quarters of its adjusted property EBITDA, its fortunes rise and fall based on how well the region performs.

Riding the recovery

This past summer, Wynn said it expected revenue will jump 22% in Macau within the next two years while EBITDA will rise 28%. Fueling that growth will be an improving Chinese economy, a rebound in VIP gambling, and a larger share of the mass market.

To help achieve that, Wynn will be expanding by building a $2 billion pavilion at the Wynn Palace that includes two new hotel towers, a fully immersive theater, a food hall, and new entertainment attractions, including an art museum.

With China pushing for Macao to diversify even further away from its reliance upon gambling revenue, Wynn could benefit from the change.

Odds are stacking up against it

But it won't be easy. Macao is now a mature market like Las Vegas and Atlantic City, and with the growth of additional markets in the Asia-Pacific region, including Singapore and Australia, all catering to premium clientele, it risks becoming oversaturated. 

And then Japan will be entering the industry to compete for wealthy Chinese gamblers as well, with new integrated resorts that are now expected to have a starting price of $10 billion. Wynn recently announced it was no longer interested in pursuing a license in Osaka, one of the cities likely slated for one of the first licenses.

There's also the possibility its Macao concession won't be extend beyond its 2022 expiration, though most analysts believe it unlikely.

Playing the long game

However, Wynn Macau's newly issued debt contains a condition that would require the casino operator "to repurchase all or any part" of a holder's notes at a purchase price, in cash, "equal to 100-percent of the principal amount... plus accrued and unpaid interest, if any, to but excluding the date of repurchase." That would come into play if Wynn lost its concession.

With its expansion plans, though, Wynn Resorts doesn't expect that to happen, and it is counting on improving conditions. So lowering its expenses now makes sense, but there is still enough of risk to make the timetable the casino operator has laid out a bit of a gamble.