The free cash flow (FCF) profile of Mohegan Inspire Entertainment Resort, the newly-opened South Korea casino complex of Mohegan Tribal Gaming Authority, should “turn positive” by the venue’s “third year of operations”, meaning it would ramp its business faster than did Incheon-based rival Paradise City.
That is according to CBRE Capital Advisors Inc in freshly-published research on the credit outlook for a number of casino businesses – including ones with Asia investment – after the financial institution recently initiated such coverage of the sector.
United States-based Mohegan – which trades as Mohegan Gaming & Entertainment – is making its first foray outside North America via the South Korea project near Incheon International Airport.
Non-gaming facilities at the US$1.6-billion Mohegan Inspire opened on November 30 – including its 15,000-seat Inspire Arena – followed on February 3 by its foreigner-only casino. The property had a formal launch ceremony on March 5.
CBRE analysts Colin Mansfield and Connor Parks said, regarding Mohegan Inspire: “Our initial forecast has the property generating a mature EBITDA [earnings before interest, taxation, depreciation and amortisation] of circa US$150 million [annually], with low-30s percent margins and sufficiently covering its debt service through ramp up. This equates to a roughly 10 percent ROI [return on investment] at maturity.”
They added: “The property could ramp faster than direct competitor Paradise City did (36 month total ramp) due to a less phased opening and an impressive slate of non-gaming amenities.”
The CBRE analysts believe that Mohegan Inspire can outperform Paradise City, given the former’s “larger focus on slots and bigger room base”.
The report projected that the “mature” slot and table win-per-unit-per day of Mohegan Inspire would be US$275 and US$3,000, respectively, a level in line with the average of its Asia peers, excluding Macau and Singapore.
The latter two markets – in both slot and table win-per-unit-per day – far exceed the other Asian casino operator rivals in South Korea, Philippines, Malaysia and Cambodia, according to CBRE, citing company filings, regulatory websites, Bloomberg, and its own estimates.
CBRE said Mohegan Inspire’s free cash flow profile “should turn positive by its third year of operations, but should have enough resources to fund debt service and maintenance capital expenditure in the interim”.
The project had access to an estimated US$179 million in cash as of December 31, 2023, “earmarked for construction payables and preopening expenses,” said CBRE.
Its analysts however cautioned: “The Korea capital structure will likely be challenged by the 17-percent PIK [payment in kind] mezzanine term loan, which could run afoul of the total net leverage covenant (includes both project level and holding company debt).”
The outstanding portion of the 17-percent PIK Korea term loan referred to, amounts to US$389 million, with a maturity in June 2027.
On Mohegan Gaming’s 8-percent secured notes due 2026, CBRE recommended a “market perform” rating. The U.S. tribal gaming operator’s restricted group leverage is forecasted to remain around “five times”.
“While we recognise the opportunity for attractive risk-adjusted yield, there are several uncertainties that hold us back from an outperform rating at this time, including upcoming CFO change (and any subsequent changes in financial policy), a nearing maturity wall, and limited visibility into [Mohegan Inspire] Korea’s ramp.”
