City of Dreams: Sleeping tight

Melco PBL's financing for the City of Dreams was almost the most high-profile Asian borrower to confront the US credit crunch. The casino developer's ability to restructure and close the deal for its Macau project in the face of vicious credit market conditions highlights both its grit and flexibility. The sponsors have scaled back the ambitious venture, located in a highly competitive market, but it is still likely to be the most striking addition to Macau's gambling market to date.

Melco PBL was formed as a joint venture of Melco, controlled by Lawrence Ho, a son of Stanley Ho, Macau's first gambling tycoon, and Kerry Packer's Publishing & Broadcasting limited. PBL subsequently spun off its stake in Melco PBL with its other gambling interests into Crown. Melco PBL is listed on New York's NASDAQ exchange, following a $1.14 billion initial public offering in 2006.

The sponsor currently runs the 220-table Crown Macau hotel and casino and the Mocha Clubs, a chain of smaller gambling establishments. The City of Dreams is its most high-profile project yet, Most of the Las Vegas-style casinos in Macau have enjoyed extraordinary success, including the first, the Sands, and the Wynn Macau, an earlier award-winner. All have a marked a departure from the crowded and often dilapidated casinos that have characterised Macau's industry until now.

City of Dreams, located on Macau's Cotai peninsular, was to include three hotels – a Hard Rock Hotel, a Grand Hyatt and a Crown Towers – together with a 450-table and 2,500-machine casino. But it would also include 50,000 square feet of retail space, a 2,000-seat theatre, and a second phase with apartments for sale.

In June 2007, ANZ Investment Bank, Banc of America Securities, Barclays Capital, Deutsche Bank and UBS signed a heads of agreement with the developer for a $2.75 billion corporate loan for both phases of the project, off the back of the IPO. The original financing split into a $1 billion term loan for syndication to banks regionally, a $250 million revolver, and a $1.5 billion B loan for syndication to US institutional loan investors.

B loans have been a staple of Macanese gaming financings, and have been a large part of the success of such deals as the Venetian Macau. The sector's attraction to such lenders was often cited as an example of the frothiness of US credit markets. When the credit crunch hit, such lenders were the first to pull back, and by July, the original financing was looking less and less feasible. The financing had been assigned a BB-/Ba3 (S&P/Moody's) rating, but had to be retooled, and in October the mandated lead arrangers, joined by Citigroup as underwriter, launched a scaled-back financing that looked much more like a project financing. The apartment complex was carved out; a move, says Melco PBL's chief financial officer, Simon Dewhurst, that meant that banks could not sweep the proceeds from apartment sales if the project goes ahead.

But the financing was flexed by roughly 50bp, and at 275bp over Libor was priced to sell. Of the lowered $1.75 billion total, $1.5 billion was a seven-year term loan A and $250 million a five-year revolving credit facility. Both were structured to appeal to banks, and the leads offered solid fees for lower commitments. Tickets of $75 million or higher attracted 75bp, $50 million or above attracted 60bp, $25 million or higher 49bp, and 35bp could be had for $14 million.

Below the six bookrunners, Banco Nacional Ultramario, Bank of China Macau, China Construction Bank (CCB) and First Commercial Bank (FCB) came in as co-ordinating arrangers, while a further eight banks came in as underwriters. Such a large group of apparently top-tier lenders might have smacked of title inflation pre-crunch, but the strategy echoed what borrowers and their bookrunners did to escape the crunch's grip in North America.

The six bookrunners took $102 million each, while CCB took $114.85 million, FCB took $100 million, and Bank of China and Caixa Geral de Depositos took $99.7 million. Royal Bank of Scotland committed $75.72 million, WestLB $64.98 million, Commonwealth Bank of Australia $51 million, Calyon and Commerzbank each came in for $50.5 million, and Landsbanken, Millennium Investment Banking and National Australia Bank pledged $50 million.

At lower levels, Scota Capital came in for $35 million, Bank of Scotland $29.7 million, Ta Chong Bank $26 million, and BES and Dah Sing Financial were good for $25 million. Rounding out this group were Banque Fédérative du Crédit Mutuel with $19.5 million, AmInvestment Bank, CITIC Group, Industrial Bank of Taiwan, Public Bank, Shin Kong Financial Holding, Taishin Financial and Taiwan Business Bank, all with $15.15 million, and Bank of East Asia with $15 million.

The loans, which can be drawn in dollars or HK$, will start amortizing three years after signing, and contain provisions that restrict additional liens and debt, dividends, asset sales. They also mandate that the borrower stick to Ebitda-to-interest expense and Ebitda-to-total debt covenants. The two main shareholders are also providing $250 million in letters of credit, which can be drawn if the project eats up its budget contingency and Melco PBL cannot raise the difference itself.

Topping off the project financing, Melco PBL closed a $580 million follow-on ADR equity issue through UBS, Deutsche and Citigroup on 31 October, which provided enough to fund both phases in full. The completion of the sale, which was timed perfectly to coincide with a lull in the credit crunch, was an impressive vote of confidence in the developer.

The financing overcame lingering, and overblown, concerns about Chinese government visa policies. Macau is still enjoying eye-watering rates of growth in visitor numbers and, as Dewhurst notes, has barely begun to make an impression on the conference and convention market: "If 15% of the convention visitors to all of Canton's cities switched to Macau, its hotel operators would be overwhelmed".

The financing topped the polls of Asian loan bankers, and given the lender-friendly tweaks to the package this reception is easy to understand. The developer's willingness to restructure the loan, and its bookrunners' willingness to share underwriting economics, both show that while Asia still stands a slim chance of decoupling from US woes, coping with turbulence involves skills common to both markets.

Melco PBL Gaming (Macau) Limited
Status: Signed December 2007
Location: Macau
Description: Gaming and entertainment complex on Cotai peninsular
Sponsors: Melco, Crown, public shareholders
Debt: $1.75 billion
Bookrunners: ANZ Investment Bank, Banc of America Securities, Barclays Capital, Citigroup, Deutsche Bank and UBS.
Sponsor legal counsel: Richards Manuela António (Macau)
Lender legal counsel: Clifford Chance (legal), Henrique Saldanha (Macau), Allens Arthur Robinson (Australia), Conyers Dill & Pearman (Cayman Islands)
Environmental adviser: Franklin + Andrews
Gaming market adviser: The Innovation Group
Hotel market adviser: HVS International
Insurance adviser: Jardine Lloyd Thompson