It's hard to resist bad puns when you're talking about Macau's casino industry. But there's no pun at all when I say that New Cotai Holdings, one of the founding shareholders of New York-listed Studio City International (MSC) , has had to fold.
New Cotai, backed by the hedge funds Silver Point Capital and Oaktree Capital Management (OAK) , filed this week for Chapter 11 bankruptcy protection in New York. It collapsed under US$856 million in debt.
That's a bet gone badly wrong. Will there be more companies to fall, as Macau suffers through a particularly poor patch of form? Or is this, as some analysts say, the end of a bad run?
Now, life is far from over from New Cotai. Silver Point are distressed-debt specialists, and New Cotai has entered bankruptcy protection looking for time to negotiate the sale of its Studio City shares.
New Cotai was set up in 2006 initially to hold a 40% stake in Studio City, which runs the movie-themed Studio City resort in Macau. Studio City opened in October 2015 with a splash, and a US$70 million-dollar movie advertisement, The Audition, directed by Martin Scorsese and featuring Leonardo DiCaprio, Robert De Niro and Brad Pitt.
I thought Studio City was pretty cool when I stayed there. There's a figure-8 Ferris wheel in the middle of the building, for luck's sake, since "8" sounds like "fortune" in Cantonese.
Studio City listed its American-depository shares in New York in October 2018, in a US$359 million IPO. That left the casino operator with a market value that now stands at US$1.5 billion. Its shares are still up 52% since their debut, but slumped in January in conjunction with lower business at the tables in Macau.
Gambling revenue fell 8.3% in April, compared with the same time last year. Gambling figures were also down in January and March, after two straight years of growth. During that run, it was common for Macau's monthly gambling figures to leap 15%.
Melco Resorts & Entertainment (MLCO) , which spun Studio City out of its other Macau casino operations, retained a 57% controlling voting interest in Studio City International through a subsidiary holding Studio City's Class A shares. New Cotai was left with a 23% stake, and other Silver Point affiliates held 13%.
New Cotai said in its filing that it wants protection to negotiate with its lenders. Otherwise it faced defaulting on that US$856 million in debt.
The company blamed unexpected setbacks at Studio City for leaving it without the cash to pay its debts. Although the Studio City casino and hotel opened in 2015, construction overran by US$300 million, and the casino got fewer gambling-table permits than it expected.
The casino has always planned a second phase of expansion. Studio City has now pushed that from July 2018 to July 2021. New Cotai also blames its bankruptcy on "unanticipated declines in the Macao gaming market."
Macau (a former Portuguese colony also known under the Portuguese spelling, Macao), gets more than two-thirds of its gamblers from mainland China. So the slowdown in China's economy has hurt business. Not to mention that Chinese punters do not feel lucky - they have been beaten down by pessimism over China's trade war with U.S. President Donald Trump. The recovery in China's economy in the past couple of months, and the smiles you'll see in boardrooms, have come too late for New Cotai.
Due to the delays and setbacks, the "Studio City project and its operations are therefore still in their ramp-up phase," New Cotai said in its filing, and the "project has not yet achieved the financial and operational performance necessary to meet all the project's capital requirements."
New Cotai said it doesn't believe Studio City's true value is reflected in its stock price. If the project can stick to its timeframe, its noteholders should get "sufficient value" from New Cotai "to repay the notes in full."
Studio City shares are now in play. They have actually rallied 12.4% in the last week as the bankruptcy unfolded.
Why? Melco Resorts Chairman and CEO Lawrence Ho has indicated in the past that the company might look to ramp back up its shareholding in Studio City.
Ho, one of the 17 children of legendary gambling magnate Stanley Ho, said in 2017 that he and the distressed-debt hedge fund guys were in talks already for a possible buyout.
"It's clear that those guys are very smart and very good at what they do," he told Inside Asian Gaming. "They're distressed debt guys so there's never going to be a scenario where we can take advantage and try to take them out at below market value."
Ho said, prior to the company going public, that the two sides "can't even agree on what's fair market" price for Studio City. "If we do buy them out at a higher valuation somewhere down the road, so be it."
Melco International, the group's parent company, began buying out Aussie casino company Crown Resorts, its partner in a joint venture known as Melco Crown Entertainment, in 2016. That's what is now listed as Melco Resorts & Entertainment.
Opportunistic investors are clearly betting that Lawrence Ho, or another interested party, will bail out Silver Point and Oaktree at a price they'll accept for the Studio City shares.
Studio City said on Friday that it is "aware" of the bankruptcy of its second-largest shareholder, which I think we can all agree is just as well. It doesn't anticipate the negotiations will have any "material impact" on the business operations of the casino resort, or the funding of its second phase.
The casino is already a US$3.2 billion project, and embarking on a US$1.4 billion construction project for its expansion. S&P Global Ratings said Studio City can withstanding the bankruptcy, and fund the construction "with operating cash flow, cash on hand, and new debt."
New Cotai is a holding entity, so it doesn't affect the actual running of the casino. But the bankruptcy, which could rumble on for the next 12 months, would disrupt any efforts by Studio City to raise money in the capital markets.
The court case is an "overhang," S&P notes, and there's a potential large supply of Studio City shares in the market "if there are no takers."
The acquisition of the shares would cost US$300 million to US$350 million, S&P figures. The bankruptcy was triggered when notes issued in 2013 came due on Wednesday, and New Cotai didn't have the cash to handle them.
They're betting Ho will put his money where his mouth is. "Separately, and hypothetically," the rating agency says, Melco Resorts "has the financial buffer to increase its shareholding in the company, should it be interested in acquiring the stakes held by New Cotai Holdings."
Sounds like a sure bet if ever there is one.