Casinos Threatened by Default Risk after Macau Closes its Door

5 Feb, 2020 03:55
source: Singularity Financial

On February 4th, city officials ordered Macau casinos to close their doors for 15 days to help curb the spread of the coronavirus outbreak that has killed hundreds of people in China.

According to the StarMine Combined Credit Risk (CCR) model by Refinitiv, three of the four U.S. listed casino resorts score in the riskiest quartile of all casinos likely to default, including MGM, Melco and Wynn Resorts. These scores, of 19 and under, also correspond to implied credit ratings of BB+ or worse, suggesting a lack of financial stability in the long-run. The model quantitatively assesses and predicts credit risk and the probability of default, suggesting that if the coronavirus problem goes on for a long period – these casinos are in danger of default in the next year.

The peak Lunar New Year holiday season in late January is a popular time for travel to the Macau casinos. This year, visitors are being screened for coronavirus as they enter the gaming area. As a result, Macau’s gross gambling revenues dropped, falling 11.3% year-over-year to $2.76 billion, according to Macau’s Gaming Inspection and Coordination Bureau. And shares of some of the biggest casino companies in the world, including MGM and Las Vegas Sands, have taken a hit since Jan. 17.

Gross gambling revenue could decline 65% year-over-year in February if Macau’s casinos closed for two weeks, Jefferies analysts Andrew Lee and Lois Zhou said Tuesday.

It is evident that analysts polled by Refinitiv have become more bearish on these stocks as the StarMine Analyst Revisions Model score has fallen drastically on the coronavirus news. Las Vegas Sands Corp.’s score plunged to 2 from 47 during the last days of January. Similarly, MGM Resorts is in the bottom quartile, suggesting that analysts are likely to revise earnings estimates downward for these companies.

Las Vegas Sands is in the strongest position among its peers, as it is the only one with an StarMine earnings quality score in the top quartile. The company scores 84 out of a possible 100. Its high score suggests that profits could be from sustainable sources. The company’s cash flow and operating efficiency also look healthy, thus giving the company some cushion during the slowdown in the critical New Year period. What’s more, among its peers Las Vegas Sands has the strongest StarMine model scores, implying that it is best positioned to weather the coronavirus effects on its market.

On the flip side, when looking at the Macau casinos across the three StarMine Models, Wynn Resorts consistently has the bottom scores for all three measures, placing it in the weakest position among its peers and more at risk should the coronavirus continue to slow down business.