MACAU The shadowy companies that bring China's millionaires to the gambling tables of Macau are facing their toughest time since the 2008 collapse of Lehman Brothers, and some of the smaller players may soon drop out of the game for good.
These junket operators, who extend credit to rich gamblers and then collect any debts in exchange for a hefty commission, bring in about 70 percent of gambling revenue in Macau, the world's most profitable gaming destination. They accounted for $22 billion in revenues last year when business was booming.
Licensed in Macau, junkets help collect debts in China although their presence on the mainland is in a legal grey area. Part money lenders, part luxury concierge service, they often host China's elite in extravagant suites or palm-fringed pool villas owned by the billion dollar casino companies.
When it comes to collecting debts, indelicate means are not unknown.
But back-to-back months of disappointing Macau gaming growth show how China's slowing economy has hurt business in the only place in the country where Chinese nationals can legally gamble in casinos. China's surprise interest rate cut on Thursday may not be enough to turn the tide.
Monthly turnover ascribed to China's super-wealthy VIP rollers contracted year-on-year in June for the first time since 2008.
AMAX Holdings (0959.HK), once among the most profitable players in Macau's junket industry, warned investors on June 29 its financial health had deteriorated so badly that it could cast doubt on the company's survival.
Five days earlier, AMAX's biggest shareholder was savagely beaten with hammers and sticks while dining at a restaurant in a Macau hotel where the company holds a 25 percent stake in its casino section.
Although the attack did not appear to be related to the company's financial woes, it revived images of a violent gang-ridden past that Macau has tried hard to bury as it moves to transform itself into Asia's answer to Las Vegas.
The health of the junket industry is critical for Macau's casinos, including those owned by U.S. gambling titans - Sheldon Adelson's Sands China (1928.HK) and Steve Wynn's Wynn Macau (1128.HK). Macau's gaming revenues are six times that of Las Vegas.
Macau, a 50-minute ferry ride from Hong Kong, has more than 200 registered junket companies, also known as VIP room operators. When the Chinese economy weakens and liquidity is scarce, they have a tougher time collecting debts and recycling the funds as fresh loans.
"On average, repayment period is around 15 days. Now some gamblers are asking for 2-3 days longer. Only if it is a very special situation will we consider it," said Kenny Leong, chief executive of Nasdaq-listed Asia Entertainment and Resources Ltd AERL.O, one of Macau's top ten VIP gambling room promoters.
Smaller junkets are particularly affected by slower growth, industry experts say, because they're generally less adept at collecting debts.
"(The larger players) keep your travel documents, passport or ID (identification cards) until you pay them. They essentially hold you in custody. If you don't pay, they will ask your relatives and friends to come and pay," said Macau-based political analyst Larry So.
AMAX, controlled by Macau VIP room operator and attack victim Ng Man-sun, operates through profit-sharing deals with junkets. It is still battling to reclaim HK$1.9 billion ($245 million) it indirectly lent to high rollers at Melco Crown's MPEL.O Altira casino in 2007 and has relied on its investment in Macau's Greek Mythology casino for the bulk of its revenues since then.
The Greek Mythology casino, which is owned by former Macau kingpin Stanley Ho's SJM Holdings (0880.HK), is located in the hotel at which Ng was publicly attacked last month.
In a filing to the Hong Kong stock exchange on June 29, AMAX said its liabilities exceeded current assets by HK$9.9 million ($1.28 million).
"This condition indicates the existence of an uncertainty which may cast significant doubt about the group's ability to continue as a going concern," the company said.
One casino executive said junkets had already cut back on credit extension.
"Junkets have stopped extending as much credit but could a situation like AMAX happen again? For sure," said the executive, who declined to be named due to the sensitive nature of the issue.
BIGGER PLAYERS TO DOMINATE
Hoffman Ma, deputy chairman of Success Universe Group 0478.HK which has a joint venture with casino king Stanley Ho's SJM Holdings (0880.HK) to operate Macau casino Ponte 16, said smaller players would get swallowed into larger junkets rather than stop operations.
"It will more likely be the big guys dominating," Ma said in an interview at Ponte 16's French-themed lounge.
Neptune Group Ltd (0070.HK), the listed arm of one of Macau's biggest junkets, said in February it was looking to buy more VIP room operators in Macau and in other Asian countries.
Leong, the CEO of big gambling room promoter AERL, said his company was hoping to take advantage of the deteriorating economic environment to acquire smaller junket operators within the coming year.
Some junkets are eyeing capital markets to fund expansion, although that will entail shining a brighter spotlight on companies used to operating away from the public sphere.
AERL said in May it was considering a listing in Hong Kong alongside its Nasdaq-traded shares. Other firms including Tak Chung Finance, an affiliate of one of Macau's biggest junket operators, and Sun Finance, tied to Macau junket SunCity, are also considering public offerings.
(Editing by Emily Kaiser and Raju Gopalakrishnan)