Japan’s plans to establish integrated casino resorts is off to a stuttering start with only two bidders vying for three licences, dashing lenders’ hopes of multi-billion dollar financing opportunities that could have led to debt of up to ¥1.14trn (US$8.77bn) combined.

Nagasaki and Osaka are the only two candidates to have bid for the licences after the local assembly in the third city of Wakayama voted against the project last month.

It is not clear if another bidder will be allowed to apply for the third licence, although no other party has been waiting in the wings to do so.

“It is yet to be determined what to do in case a number of authorisation does not reach the maximum of three,” said a spokesperson at Japan Tourism Agency, the government body handling the bidding process.

Wakayama’s rejection of a proposal for a ¥470bn integrated casino resort from Clairvest Neem Ventures is a blow to the lenders involved. Clairvest had obtained a letter of intent for a ¥325bn loan from Credit Suisse as the arranger and four financial institutions, including Cantor Fitzgerald and Hanwha Investment & Securities.

On April 20, 22 out of 40 representatives at Wakayama’s prefectural assembly voted against the proposal, questioning the feasibility of the financing.

Wakayama prefecture was not available for comment, while Credit Suisse declined to comment.

Cold feet

With one less candidate, the other projects for Nagasaki and Osaka could benefit as the universe of lenders keen to finance the integrated casino resorts seems to be dwindling compared to the strong interest the idea received when it was first mooted a few years ago.

Japan passed the integrated resorts implementation act in July 2018 and attracted top-tier casino operators such as Caesars Entertainment, Las Vegas Sands, Melco Resorts & Entertainment and Wynn Resorts for various locations including Hokkaido, Tokyo and Yokohama. Asset-hungry Japanese lenders were also keen to be involved in the financings for the projects.

However, most operators withdrew over the last couple of years as the coronavirus pandemic took a toll on casinos around the world.

“The pandemic played the largest part in the last two years, which delayed the country’s schedule to select three locations,” said a source at a Japanese bank.

Strong advocates of the projects have also departed in recent years, such as prime ministers Shinzo Abe and Yoshihide Suga who stepped down in 2020 and 2021 respectively.

Other developments have impacted the bidding process. For instance, a strong opponent of casinos, Takeharu Yamanaka, was elected mayor of Yokohama last year, leading the city to withdraw its bid for the integrated resorts.

The absence of major casino operators adds to the concerns loan market participants already harboured about the short duration of the integrated resort concessions and mandatory background checks for financiers. The initial validity of the licences will be 10 years with renewals required every five years. Bankers consider the timeframe too short for sponsors to recoup the initial costs after construction is completed.

Potential winners

Even as the only two bidders for three licences, Nagasaki and Osaka are not guaranteed to be selected when results of the bidding are announced later this year.

Some observers believe that the Japanese government might not approve Nagasaki’s project because of its opaque sources of funds, the weak credit profile of the sponsor and geographical disadvantages.

Nagasaki’s prefectural assembly approved its integrated casino resort project in April despite no financing details being disclosed. Kyushu Resorts Japan, the project operator established by Casinos Austria International Japan, is raising ¥263bn in senior and mezzanine loans from both domestic and international financial institutions for the ¥438.3bn project. US real estate firm CBRE will help finance the project, but no Japanese mega-banks are said to be involved.

That leaves Osaka, Japan’s second-largest city, on a stronger footing to win the licence than Nagasaki, a relatively small city on the island of Kyushu.

Moreover, MGM Resorts International (40{4e908c29df01d999f087e4f922633998e2ded1c72f05851cd6252034960daee5}) and Orix (40{4e908c29df01d999f087e4f922633998e2ded1c72f05851cd6252034960daee5}) are leading a consortium of 22 companies that has established project operator Osaka IR. MUFG and Sumitomo Mitsui Banking Corp have provided commitments for a ¥550bn project financing backing the ¥1.08trn project.

The two banks have already approached potential lenders for syndication of the loan, but may face challenges due to the riskier nature of the businesses as well as concerns over the gaming sector.

The opening of the project on the artificial island of Yumeshima in Osaka has now been pushed back to 2029 from an originally intended target of 2025 due to the impact of the pandemic.

Public concerns around links between gaming and organised crime persist in Japan and domestic banks tend to be more conservative than the international lenders which have extended loans to casino projects in Macau or Singapore.

“The image of the casino was bad in the first place, and dispelling that notion is hard,” said one source familiar with the situation.

The pandemic also provided lessons for the casino operators, which expected to rely heavily on Chinese tourists. While the performance of global casino operators in Las Vegas has recovered to 2019 levels or better, their operations in Asia are lagging behind.

For the quarter ended December 31, MGM Resorts recorded revenues of US$3.06bn, a 104.7{4e908c29df01d999f087e4f922633998e2ded1c72f05851cd6252034960daee5} jump compared to the corresponding quarter a year earlier. However, in March, Moody’s downgraded MGM Resorts International‘s corporate family rating to B1 from Ba3, reflecting a slower than expected recovery in Macau and high leverage.


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