Melco Crown sells $600 million of high-yield bonds

The Macau casino operator taps into a gaming-focused investor base in the US to sell $600 million of eight-year bonds with a 10.25% coupon, despite the volatility in global debt and equity markets.

New York-listed Melco Crown Entertainment, which operates casinos and entertainment resorts in Macau, has sold $600 million of new eight-year high-yield notes. The deal priced on Wednesday through MCE Finance, which is a wholly owned subsidiary of Melco Crown.

The Reg-S/144A bonds carry a 10.25% coupon and were re-offered at 98.671 to yield a slightly wider 10.5%. This is equivalent to a spread of Treasuries plus 727bp. The maturity date has been set for May 15, 2018, but the bonds are callable after four years.

The offer was made in the US and therefore the arrangers managed the deal between their respective US high-yield desks and Asia. Deutsche Bank was lead-left bookrunner on the deal and solely in charge of the US roadshow and distribution. It was also global coordinator in Asia and Europe. The other bookrunners were ANZ, Bank of America Merrill Lynch, Citi, Commerzbank Group, Credit Agricole CIB, Deutsche Bank, National Australia Bank, RBS and UBS, of which BoA Merrill and RBS were said to have been the only active ones.

The new bonds will extend the maturity of Melco Crown's debt at a cost that is arguably higher than what the company was paying previously, but this is a sensible move to take given its stable cash flows. "All their near-term amortisation needs have been met," said one banker.

It is expected that it will use the proceeds for the refinancing of project lending facilities for three businesses and properties that are fully operational and generating revenues, including the first phase of its Citi of Dreams project which opened for business in June last year.  

Despite the sovereign debt issues that have been dominating the headlines in Europe and the tightening of regulations in China, Melco Crown decided to go ahead with the sale after it ended its roadshow earlier this week. And despite the volatile backdrop, the deal fared comparatively well with spreads having tightened by 2bp at the end of Asian trading yesterday.

The final order book came in at $1.15 billion from 70 accounts. Three-quarters of the deal was sold into the US, 11% into Europe and the remaining 14% into Asia.

"Initially Asian investors were clouded by poor market sentiment," said one source close to the deal. In the US, however, there is a dedicated high-yield gaming audience that had been looking at Melco Crown. And since the pricing happened out of the US, investors could be prompted to come into the deal without being impacted directly by what was happening in the China high-yield property market.

One banker commented that the mood among Asian investors was still fragile. "We need to see a few more days of relative calm in the equity markets before investors and issuers feel comfortable to return to the market again," he said.

There is saturation not only in the China real estate market, but in the greater high-yield space in Asia. To get done, deals will have to tap into other sources of demand and Melco Crown is an example of this. The company found a defined gaming investor base in the US, which allowed the deal to price and experience some relatively good performance in the secondary market.

With regard to the high-yield sector, a source familiar with Melco Crown said that issuers should wait in order to allow the market to digest the recent supply. "Investors are shell shocked," one banker said. "The overhang of loose bonds from recent deals that were poorly placed needs to be absorbed before the market turns constructive."

Fund managers were the largest group of investors in the Melco Crown offering, taking 89%. Banks bought 2%, insurance houses 8% and other types of investors the remaining 1%.

Prior to the sale, Moody's assigned a B1 rating to the bonds and a Ba3 corporate rating to MCE Finance. Melco Crown is a joint venture between Hong Kong-listed Melco International Development and James Packer's Australia-listed Crown Limited. It is one of six companies granted concessions or sub-concessions to operate casinos in Macau.

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