The firm behind a Pacific island casino project on Saipan has had its issuer default rating downgraded to ‘CCC’ by Fitch Ratings Inc, from the ‘B(EXP)’ expected rating assigned to it in September 2016.
The new final assessment for Hong Kong-listed Imperial Pacific International Holdings Ltd means the ratings house believes the firm faces “substantial credit risk” and that “default is a real possibility” according to the ratings definitions featured on Fitch’s corporate website.
The assessment relates to Imperial Pacific’s status as a long-term foreign-currency issuer.
Fitch has also downgraded the casino resort investor’s proposed U.S.-dollar senior secured note issue to an expected ‘B-(EXP)’ rating, from ‘BB-(EXP)’. ‘B’ category ratings indicate an investment is “highly speculative” and that “material credit risk is present,” according to Fitch definitions. The recovery rating remains at ‘RR2′.
“The downgrade of the final ratings reflects the company’s need to fund advances to customers and bear customers’ credit risk due to the lack of licensed junket operators in Saipan,” said Fitch in a Wednesday press release.
“So far only one junket has been licensed by the Commonwealth Casino Commission of Saipan,” added Fitch in its release, referring to the local gaming regulator.
“Thus, IPI [Imperial Pacific] has been operating its VIP business through third-party introductions and internal marketing, with IPI granting credit directly to VIP customers who are partly backed by guarantors. Fitch believes IPI’s receivable days have expanded well beyond 100 days in view of the strong VIP rolling chips volume in the past six months,” the ratings house further stated.
Imperial Pacific said in a January 2 filing that its 2016 unaudited VIP table games rolling chip turnover totalled nearly US$32.37 billion, a number greater than the US$31.02-billion VIP gambling turnover reported in 2015 by the Venetian Macao, a flagship property of casino operator Sands China Ltd in the Macau casino market.
Shen Yan, president of global capital markets at Imperial Pacific, told GGRAsia in a November interview, that the firm would be bringing in junket partners in time for the opening of its permanent casino resort on Saipan; an event the firm said last week is due to take place “in the first quarter” of 2017. In previous statements it said the venue as a whole was due to open “by 2017 Chinese New Year”, which falls on January 28.
“With junkets, we will mitigate the [gambling] credit risk and will also be able to broaden our customer base,” Mr Yan had additionally said in November.
VIP credit risk
In the Macau casino market, junkets are allowed to issue gambling credit to players and arrange for collection of money owed on gambling losses, reducing the risk to the casino of player credit default.
In return, Macau junkets are offered by the house either a commission on rolling chip volume – which the Macau government has said should be capped at 1.25 percent; or are offered by the house a share of profits on VIP gambling. The first is steady income, the second can fluctuate, due to the volatility in the house’s hold rate for baccarat, the game of choice for Chinese and other Asian table games players.
Fitch said in its Wednesday announcement its ratings were based on the assumption Imperial Pacific’s casino would be offering commission rates of 1.40 percent to VIP players it recruited directly; and 1.85 percent to junket operators in the period 2016 to 2019.
In the Las Vegas market, only the house is allowed to issue credit, although licensed junkets there can earn commission for introducing players to the management.
Imperial Pacific unit Best Sunshine International Ltd is currently operating a temporary casino (pictured) – which opened in July 2015 – on Saipan, the main island of the Commonwealth of the Northern Mariana Islands (also known as CNMI), a U.S. jurisdiction.
Fitch said on Wednesday: “Proposed notes, which will be issued by Imperial Pacific International (CNMI) LLC (Saipan), are rated two notches above IPI’s issuer default rating because they are secured by essentially all the assets of the casino and resort under construction and guaranteed by Imperial Pacific Properties (CNMI) LLC, which owns the lease of the land on which the resort is built, and by the parent, IPI.”
In a Wednesday filing, the Imperial Pacific parent said construction of the group’s permanent facility – called Imperial Pacific Resort Hotel, Saipan – will cost approximately US$50 million prior to the casino’s soft opening.
“The group has just proposed to issue notes of not less than US$60 million in principal, which will provide sufficient funds for the aforesaid construction,” added the filing.
The notes will bear interest “at the rate of 8.5 percent per annum, payable semi-annually in arrears,” the firm said in a separate filing.
Fitch said on Wednesday that Imperial Pacific’s casino licence requires the casino to start operating by April 2017 and the hotel by August 2017. The rating agency said it believes Imperial Pacific is on target to meet its construction deadline, but warned that longer-term capital expenditure funding for the casino resort is not yet in place.
“Construction to date has been funded via short-term borrowings and internal cash generation. Failure to secure funding for the completion of both construction phases may further pressure IPI’s liquidity,” added Fitch.
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Amount that each Macau casino operator paid for the circa six-month extension of their respective contract