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Macau casino bonds are plunging as President Xi Jinping’s corruption crackdown against “flies and tigers” spooks VIP gamblers.

The yield on Wynn Macau Ltd.’s notes due October 2021 jumped 93 basis points this month and touched a record 5.80 percent today, data compiled by Bloomberg show. That on Melco Crown Entertainment Ltd. (MPEL) debt due 2021 reached an all-time high of 5.61 percent. The six biggest Hong Kong-listed Macau casino stocks have plummeted 32 percent on average this year.

Gross gaming revenue in Macau, the only place in China where casinos are legal, may fall this year for the first time since data starting in 2002, amid Xi’s anti-graft campaign, slowing economic growth and protests by croupiers for higher wages. Tour operators are offering private jets to fly China’s high-spending gamblers, or VIPs, to Melbourne and Las Vegas so that they can avoid the increased scrutiny in Macau.

“There’s a critical mass of headwinds without even getting into the ’China is slowing’ dynamic,” said Kevin McSweeney, a Toronto-based fund manager at CI Investments Inc., which oversees an equivalent of $90 billion of assets. “Investors have found more reasons to sell than to buy right now.”

Growth Prospect

President Xi’s probes are targeting Communist Party cadres from the top to bottom ranks nationwide as he warned that the 87 million-member strong party is facing “severe dangers” from corruption. Liu Tienan, the former deputy head of the National Development and Reform Commission, is the latest high-ranking official facing trial on bribery charges.

Xi’s top-to-bottom approach has sent chills through the economy. An index tracking prices of the world’s 100 most sought-after fine wines touched the lowest since 2009 in July. Retail sales rose 11.9 percent in August from a year earlier, below the average 15.8 percent over the past five years. A Purchasing Managers’ Index (CPMINDX) for manufacturing was probably 51 in September, a second straight month of slowdown, according to a Bloomberg survey of economists before official data due Oct. 1.

Barclays Plc cut its estimate for 2014 expansion in the world’s second-largest economy to 7.2 percent from 7.4 percent this month, while Nomura Holdings Inc. also lowered its estimate to 7.2 percent. The yield on the 10-year government bond fell 22 basis points this month to 4.02 percent. The yuan has gained 0.1 percent, its slowest advance in five months.

First Drop

Gross gaming revenues will probably drop 1 percent this year, compared with an earlier prediction for 5 percent growth, CLSA Ltd. analysts led by Aaron Fischer wrote in a Sept. 24 note. They also cut the 2015 growth estimate to 5 percent from 10 percent, compared with an average of 30 percent in the past 10 years.

VIP guest numbers are unlikely to turn around soon as customers are concerned about the anti-corruption drive, Bank of America Merrill Lynch analysts led by Billy Ng wrote in a note this month. Macau banned jewelry and watch retailers operating in casinos from adding new card devices starting in July, Francis Tam, the city’s secretary for economy and finance, said on June 26. That had made it harder for gamblers to buy expensive goods in exchange for cash.

“The sustained slowdown in gross gaming revenue now looks more prolonged in investors’ minds,” said Edmund Harriss, investment director in London at Guinness Atkinson Asset Management LLC, which oversaw more than $1 billion in assets as of the end of August. “Macau is dependent upon the Chinese market and the clampdown looks to be more sustained and thus has a high impact on Macau revenues.”

Valuation Issue

Over 1,000 casino workers took to the streets on Aug. 25 for a seventh time this year to demand better pay and working conditions, the largest demonstration by industry employees so far in 2014. Macau Gaming Industry Frontline Workers’ union is planning more protests including China’s week-long National Day public holiday, which starts from Oct. 1.

Macau casinos “will stabilize” as the Chinese special administration region’s chief executive Fernando Chui begins his second five-year term in office, Wynn Resorts Ltd. (WYNN) Chairman Steve Wynn told reporters in Macau on Sept. 23. Wynn Macau has also had “no problems” in filling casino jobs with locals and non-local employees, the billionaire said.

The yield on Wynn Macau’s bonds due 2021 is above the average 5.11 percent since its October 2013 debut, data compiled by Bloomberg show. The rate on Melco Crown’s debt due 2021 was 53 basis points above its average in the past year. The average rate on Asian high-yield corporate dollar bonds is 7.3 percent, according to a Bank of America Merrill Lynch index.

“Risk of default isn’t the issue,” said Harriss. “Perhaps it’s just one of valuation.”

Workers’ Strike

Shares of Galaxy Entertainment Group Ltd., the casino operator founded by billionaire Lui Che-woo, have tumbled 32 percent since the end of last year. SJM Holdings Ltd. (880), chaired by another billionaire Stanley Ho, fell 40 percent this year, the most among the six-largest Macau casino operators listed in Hong Kong.

Galaxy Entertainment had a total debt-to-asset ratio of 1.39 percent, lower than the global industry average of 26.8 percent, according to data compiled by Bloomberg. SJM’s ratio is at 5.45 percent, while those of Wynn Macau and Melco Crown are 37.8 percent and 31.9 percent, respectively.

Some of the Macau casino bonds “still represent solid fundamental values,” said IC Investment’s McSweeney. “Default risk is low, debts are manageable in the context of the underlying companies’ cash flows, and the secular growth story should return. For now, however, this is not the story.”

To contact the reporter on this story: Fion Li in Hong Kong at This e-mail address is being protected from spambots. You need JavaScript enabled to view it

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