Macau deal market given a lift by Stanley Ho IPO

By Tony Munroe

HONG KONG (Reuters) - A $1 billion IPO planned by tycoon Stanley Ho's Macau flagship gives investors a rare chance to bet on a casino boom that has been funded mostly by loans, and more public markets capital-raising is on the cards.

Given the billions required to finance a planned construction spree and the change in funding needs as a gaming sector that has surpassed the Las Vegas Strip matures, operators are expected to step up the issuance of debt and equity, bankers said.

"There's still probably a handful of $2 billion or so projects coming, if not more, and that can't all be digested in the loan market," said Chris Gammons, managing director in Citigroup's financial entrepreneurs group.

"I expect to see some of these financings to also come via the debt and equity markets," he said.

Ho's Sociedade de Jogos de Macau (SJM), the former monopoly operator whose market share is shrinking at the hands of U.S. heavyweights Las Vegas Sands (LVS.N) and Wynn Resorts Ltd (WYNN.O), plans to build up its warchest with a long-expected initial public offering set for February 1, a fund manager said.

SJM would join a small handful of listed Macau casino firms that includes Galaxy Entertainment Group Ltd (0027.HK) and Melco PBL Entertainment (Macau) Ltd (MPEL.O), a venture between Ho's son Lawrence Ho's Melco International Development Ltd (0200.HK) and Publishing & Broadcasting Ltd PBL.AX of Australia.

Other projects being built include Melco PBL's City of Dreams, the GalaxyWorld Resort, and Macao Studio City, which is backed by Hong Kong's ESun Holdings Ltd (0571.HK).

Wynn is building a second resort, Wynn Diamond Suites, and last June doubled the size of a loan facility to US$1.55 billion to fund expansion of its existing resort and finance the new one.

MANY APPLES, MORE BITES

One attraction of Macau for banks is that it offers several chances to finance the same project.

"Transactions require construction financing, opening financing, post-opening financing -- this presents several opportunities through the lifetime of the project with various investor bases," said Gammons.

Citigroup (C.N) has been among the most active financiers of the Macau boom. It helped arrange two syndicated loans worth a combined US$5.8 billion for Sands' giant Venetian Macao casino, and sponsored Melco PBL's $1.3 billion IPO and was also part of the firm's US$1.75 billion loan raised in September.

The Melco PBL loan showed that even soaring Macau is not immune to the perils of global credit markets. The firm had hoped to raise US$2.75 billion but cut the deal's size and sweetened its price by 50 basis points, sources told Reuters Basis Point.

The volume of syndicated lending from Macau more than doubled last year to US$9 billion from six deals, according to Dealogic, but equity volumes from the former Portuguese enclave were halved from a year earlier to just US$658 million.

Bond issuance from Macau has also been scarce, with Galaxy's US$600 million offer in 2005 the only global public markets issue since Ho's decades-old gaming monopoly lapsed in 2002.

"A lot will depend on volatility in credit markets. Public high-yield is a natural financing option but at the end of the day, it will come down to cost," Gammons said.

Macau has also attracted the attention of private equity. In October, UK buyout firm Permira PERM.UL paid US$838 million for 20 percent of Galaxy, which is building what will be the world's second-largest casino in Macau.

"The public markets will come to the fore, increasingly," said Mark Ebbinghaus, head of Asian real estate, lodging and leisure at UBS (UBSN.VX)(UBS.N), which was one of the sponsors of a US$592 million share sale by Melco PBL in late 2007.

CASH SPINNERS

Heavy cash flows give casino operators funding flexibility.

Las Vegas Sands expects to recoup its US$2.4 billion investment in the Venetian Macao, the world's biggest casino, within three to five years. In 2004, it paid off a US$120 million five-year loan for its first Macau casino, the Sands, within a year, banking sources told Reuters Basis Point.

As operators become more established they may securitize some of their assets by forming property trusts, or separating operating companies from real estate holdings, Ebbinghaus said.

"Moving forward as things get more competitive, some groups will look at getting asset-light and the groups won't necessarily want to own all the real estate," Ebbinghaus said.

"As time moves on and they want to do more and more, the increasingly heavy balance sheet with lots and lots of real estate on it is going to be a competitive disadvantage," he said.

Las Vegas Sands, for example, has said it was interested in spinning-off its retail properties at the Venetian Macao into a listed property trust.

(Additional reporting by Jacqueline Poh and Kennix Chim; editing by Dominic Whiting)