VIP Credit Risk Exposure to Casinos

Posted: January 23, 2011 in Uncategorized

Saturday, 22 January 2011

Extracts of Asian Gaming Intelligence

VIP credit risk a micro, not so much macro, issue in Macau

 Rumours this week that a Macau casino operator may be in the hole for HK$100 million because of liquidity issues faced by a junket over player bad debt is tending to provoke one of two responses in town:

a) concern

b) surprize that it wasn’t more money and more than one junket

Although it is likely a similar scenario has played out at other casinos around town, even a few hundred million HK dollars of un-collectibles would only represent a fraction of one percent of total VIP revenue, and it still premature to presage the re-emergence of a bad debt crisis

Still, with Macau VIP gross revenue growing by 62% year on year in the fourth quarter of 2010 and fierce competition in the segment by casinos and junkets for players via the mechanism of profit share, it’s difficult to see how every dollar of credit issued to players could be copper bottomed.

… Without pointing any fingers, it’s interesting to note that some of the same personalities that were involved in that competition war have also been linked with the new one.

… The need for junkets to preserve their liquidity and profit margins are certainly powerful market-driven mechanisms for imposing credit discipline. But it only takes one or two casinos with a higher appetite for risk than the average—possibly due to internal pressures linked to stock price or balance sheet issues—and an eager and ambitious junket operator willing to serve that higher risk appetite (in order to get potentially above market average profits), for that market discipline on credit issuance to unravel. This vicious circle is made potentially more vicious because of the fact that listed casino operators don’t immediately have to justify high risk Macau lending policies to their shareholders because usually they’re not the ones doing the credit issuance. When it goes right, management in the individual property claim the success. When it doesn’t, they blame the junkets.

… While we’re on the subject of VIP profit share, a Macau insider has helpfully pointed out to Asian Gaming Intelligence that there is a significant opportunity cost associated with it. The clue is in the name of the business model—”profit share”. Junkets (and casinos) pay corporate tax on anything called ‘profit’.

Editor’s Comment:

Even with the size of Macau’s VIP Junket market and mechanism, the Chinese territory feels the strain of narrow profit margins and high credit risk exposure. For Singapore IR with only two casinos and a much smaller VIP feed, it is envisaged that the Lion City’s IR casinos need to rely on its own customer acquisition power, rather than heavily relying on junkets.

More competitive - less margin - higher risk

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