The Macau Metro Monitor, March 31st, 2010



Citibank, Goldman Sachs, Barclays Capital, BNP Paribas, and UBS AG are part of a syndicate struggling to offload the $1.75BN financing of Venetian Orient Limited (VOL) they agreed to sell to preserve their relationships with Sands and to land the equity raise mandate. Due to the oversupply of Sands-related loans already available in secondary markets at more attractive yields and the upcoming Galaxy syndicated loans ($1.13BN), banks have even less reason to snap up the debt.


The syndicate underwrote the VOL financing to pay for the stalled construction of parcels five and six of Sands China’s Venetian Macao Casino Resort. In January, they packaged the debt as a project finance loan and began shopping it with a 2015 maturity and margin of Libor +450bps with varying upfront fees of 135bps-225bps implying an all-in yield as high as L+499bps. However, pre-existing loans such as the US$3.9BN Venetian Macao Limited (VML) corporate loan sold in 2007 and the SGC 5.44BN Marina Bay Sands (MBS) loan both have more attractive yields at L+621 bps and SOR + 625bps, respectively.


Aside from economics, VML is the least risky of the three because it is fully operational, followed by MBS, which is scheduled to open phase one in April.  The two pre-existing loans are also issued at the corporate level, which banks prefer to exposure in a Greenfield project financing, according to several of the bankers interviewed for this article.


VOL’s prolonged marketing process is blamed on the mid-February Chinese New Year holidays and bankers taking extended holidays during that time period. VOL’s syndication was initially scheduled to close at the end of February, but has been pushed by one month.  At least five institutions have joined the syndication, and according to bankers, commitments thus far are in line with expectations.


MGM Mirage has hired five banks--BNP Paribas, Bank of Ameirca/Merrill Lynch, HSBC, JP Morgan and Morgan Stanley--for its HK listing of its Macau operations, scheduled for the second half of this year. The deal is expected to raise about US$500 million (MOP4billion), according to sources with direct knowledge of the deal.



According to previously undisclosed court transcripts from a trial late last autumn, Cheung Chi-tai was a leader of the Wo Hop To--one of the organized crime groups in the region known as triads. A regular casino patron testifying in the murder-for-hire trial case said that Cheung was  "the person in charge" of one of the VIP rooms at the Sands Macau. Documents show that his investment allowed him a share in the profits from a VIP gambling room at the casino.


Cheung Chi-tai's ties to Sands Macau came through such a multi-tiered arrangement. His solely owned company, Jumbo Boom Holdings, provided capital for another firm, now called Neptune Group, to acquire a stake in Hou Wan, a junket operator. Hou Wan was entitled to profits from Sands Macau's Chengdu VIP room. Cheung owned more than 8% of Neptune Group in 2008, according to public filings with the Hong Kong stock exchange. That made him a substantial shareholder when the call for the dealer's murder went out.


However, Nicholas Niglio, Neptune's COO, said Neptune wasn't a junket itself but invests in VIP junkets that operate at the Sands Macau, the Venetian Macau and Galaxy Entertainment's StarWorld casinos. He said Neptune now had a 20% stake in Hou Wan, a junket operator that runs around 20 VIP tables at the Sands Macau.  A gaming official, who insisted upon anonymity, said: "This relationship (with Cheung) would be of concern to Nevada authorities. You're talking about direct ties to bad guys."


The involvement of the triads in Macau's casinos is centered on the murky and highly profitable junket business. The VIP sector brought in $9.9BN last year, two-thirds of the enclave's total gambling revenues. Macau has about 187 licensed junket operators, said Manuel Joaquim das Neves, director of Macau's Gaming Inspection and Coordination Bureau.  Asked specifically about whether Macau will strip the license from a casino operator if the regulators discover that it is hiring a junket operator with links to organized crime, Neves said: "It's separate. In principle, it doesn't affect the concessionaires."


Ko-lin Chin, a professor at Rutgers University and one of the foremost experts on Asian organized crime, says that even if crime groups are involved in the junket business, with the casinos making so much money, the government reaping huge taxes, and the citizens of Macau enjoying full employment, there is scant political will to remove them. "No one wants to crash the party," he said. "This is a feel-good story."


Yesterday, the S&P 500 finished flat in quiet trading.  The restrained performance was not particularly surprising given the holiday-shortened week and the looming release on Friday of the March nonfarm payrolls.  For the second day in a row, the Utilities (XLU) stands alone - broken on TREND. 


On the MACRO front, a slight improvement in March consumer confidence was a peace offering to the Consumer Discretionary (XLY) which has had an amazing run in 1Q10.  Consumer confidence rose to 52.5 in March from 46.4 in February, slightly ahead of the 51 consensus. The current situation component rose to 26 from 21.7 - the highest level since January - while the expectations component improved to 70.2 from 62.9 last month.  Despite a sequential improvement from February, the confidence numbers are not anything to get overly excited about. 


The S&P/Case-Shiller home-price index rose 0.3% month-to-month - the eighth straight monthly increase (a Bloomberg survey had a decline 0.3% in January).  In response to the data, the S&P 500 Homebuilder index gave back some of its outperformance, declining 1.5% on the day.  


The Dollar index recovered slightly yesterday up 0.14%.  The Hedgeye Risk Management models have levels for the Dollar Index (DXY) at:  buy TRADE (81.21) and sell TRADE (82.40). 


The VIX declined 2.6% yesterday and remains broken on all three durations - TRADE, TREND and TAIL. The Hedgeye Risk Management models have the following levels for the Volatility Index (VIX) – Buy TRADE (16.01) and Sell TRADE (18.23).


Yesterday the laggards in 1Q10 (Technology - XLK) outperformed, while the 1Q10 sector leaders (Financials - XLF and Consumer Discretionary - XLY) underperformed.   The hype over AAPL and the Smartphone generated a significant amount of excitement in the technology space. 


In early trading, crude oil is trading above $83 a barrel in New York for the first time in two weeks on signs that improving demand is eroding excess supplies.  The Hedgeye Risk Management models have the following levels for OIL – Buy TRADE (80.95) and Sell TRADE (83.13). 


In early trading in London, gold is trading higher and heading for a sixth quarterly increase.  The Hedgeye Risk Management models have the following levels for GOLD – Buy TRADE (1,082) and Sell TRADE (1,114).


In 1Q10, Copper is up 6.4% and yesterday it reached the highest level since August 2008 as demand looks strong and inventories are declining.  The Hedgeye Risk Management models have the following levels for COPPER – Buy TRADE (3.41) and Sell TRADE (3.56).


In early trading, equity futures are trading modestly below fair value after markets drifted off highs on a stronger dollar.  As we look at today’s set up the range for the S&P 500 is 18 points or 1.2% (1,159) downside and 0.3% (1,177) upside. 


Today's MACRO highlights are:

  • MBA Mortgage Apps  - +1.3%
  • March ADP Employment -23 vs. 40K consensus
  • March Chicago PMI
  • March NAPM Milwaukee,
  • February Factory Orders
  • DOE Crude Oil Inventories 

Howard Penney

Managing Director













Seldom Do We See

“Seldom, very seldom, does complete truth belong to any human disclosure; seldom can it happen that something is not a little disguised, or a little mistaken.”

-Jane Austen


It's the end of the first quarter, and what a quarter it’s been!  The S&P 500 is up 5.2%, led by the Industrials (XLI +13.1%), Consumer Discretionary (XLY +11.1%) and Financials (XLF +10.6%).


It’s the beginning of spring and spirits have been lifted with a strong first quarter; but that doesn’t mean “something is not a little disguised, or a little mistaken.”  It’s hard to see how improving sentiment can override leveraged US balance sheets, anemic demand, high unemployment, and unruly state and household budgets.


As Keith posted yesterday, “We could easily see an early month correction in April like we did in February. The intermediate term TREND line of support for the SP500 is at 1118.  From today’s price, that would be a -5% correction that my models wouldn’t consider anything but proactively predictable.”


While we did not short the S&P 500 yesterday, we did buy the VXX, as the S&P 500 tries to confirm higher-highs into quarter-end.  In early trading today, the overseas markets are reluctant to push higher ahead of quarter end, the shortened holiday week and Friday's US jobs data.  That being said, there is an outside chance we see the S&P 500 trade in the 1175-1178 range; a level we would consider managing risk around.


Some things to consider as we head into the second quarter:


(1)          While the bond market isn’t blowing up, it is sending a clear message that interest rates will be headed higher sooner than expected.

(2)          The squeeze in the “pain” trade is nearly over.

(3)          A +11.2% melt-up in the S&P 500 over a 7-week timeline is not normal.

(4)          Can the 1Q earnings season exceed expectations and deliver continued upward guidance?

(5)          Global sovereign debt issues will act as a governor on any significant upside potential.


On the sovereign debt front (and as ridiculous as ratings agencies may be), Moody’s said that Aaa-rated sovereigns with financing costs at 10% or more of revenue exceeds the limits of “debt affordability.”  This increases the number of countries that could potentially see rating “downgrades.” 


China’s stocks fell for the first time in four days last night, declining 0.6%.  For 1Q10, this puts the Chinese market down 5.1%, the worst quarterly drop since August last year.  While we have not yet officially introduced our 2Q10 themes yet, continued property-related policy risks surrounding China is still a slight MACRO headwind.


Nothing is really ever what is seems on the surface.  Just ask the venerable European institution Gartmore, which plunged 31% following the announcement of potential “breaches of internal procedures regarding directing trades.”


Function in disaster; finish in style.


Howard Penney 

Managing Director


Seldom Do We See - sp1


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