JUNKET CREDIT BUBBLE?

Junkets are getting liquidity from many sources.

With monthly VIP revenues up an average of 85% this year, Macau may indeed be benefiting from a credit bubble. However, we found no visible signs of that abating as we turned over every rock and looked in every nook and cranny on our recent trip to the SAR.  It’s not all credit related – Mass revenue was up 39% over the same period – but the junkets have bountiful access to capital.

The consensus commentary from almost everyone we met with in Macau was that business is good and there doesn’t seem to be a whole lot of risk on the horizon for the balance of 2010.  By all accounts, the junkets are flush with cash and, barring a crackdown from Beijing, will continue to keep the credit flowing to players, who in turn will keep trying their luck in Macau.  So where are the junkets getting the capital?

  • Public equity – Some of the junkets are public
  • Private equity – Junkets are paying 10% annualized interest for 30-day money.  Wealthy Chinese individuals and Chinese private equity firms are the primary lenders.
  • Operators – Most operators provide the junkets with some level of rolling working capital, usually over 30 days.  We’ve heard recently that City of Dreams, MGM (upcoming IPO), and Wynn have ramped up the lending, while LVS has been more aggressive on direct play credit.
  • “Other” sources

Apparently, the lack of good investment opportunities around the world has made the ballpark 10% annual return that many junkets offer on private placements an attractive option for wealthy Chinese to park some of their cash.  Since default on credit obligations to a junket rarely occurs (for obvious reasons), the high yield offered by junkets is viewed as safe and therefore quite attractive.

The feeling in Macau now is that although Chinese monetary tightening would lessen availability of capital, the impact on Macau would be delayed and not huge.  The bigger perceived risk is a China crackdown. If Macau gets "out of line," Beijing will use its power to pressure the junkets.  So far the new Macau Chief Executive, most of the operators (Sheldon’s behavior is much improved but not exactly perfect), and most of the junkets (there may be another shoe to drop here) have behaved.