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Korea – Foreigner only rule will limit Mohegan Sun’s Korean returns

By - 16 March 2016

Fitch Ratings has warned Mohegan Sun that it ‘will have difficulty achieving robust returns on investments’ on its Integrated Resort planned for Incheon Airport in South Korea ‘due to the restriction on gambling activities to foreigners only.’

It also warned that competition from new casinos in the Asia-Pacific region would be relentless.

Fitch stated: “Foreigner-only large-scale integrated resort projects in South Korea will face competitive pressures from other Asia-Pacific jurisdictions such as Macau, Singapore, the Philippines and Australia. We believe this pressure will not abate as the first casino opened in Vladivostok, Russia in 2015, four new large-scale casinos are scheduled to open in Macau through 2017 and Japan continues to consider legalization.”

Despite a confining regulatory environment, some operators have illustrated keen expansion interest. Mohegan Tribal Gaming Authority (MTGA), KCC Corp. and Incheon International Airport Corp. (IIAC) were selected for a license to build the $1.6bnInspire integrated resort (phase 1) at Incheon International Airport. The local Paradise Co. and Japan’s Sega Sammy have a joint venture (JV) project under way. Caesars and partner Lippo have not yet begun their JV project, and the timeline remains uncertain. Genting Singapore is also pursuing a $1.8bn project on Jeju Island.

South Korea already has 17 casinos, but only one of them; Kangwon Land is allowed to open its doors to local players and with returns from Chinese plays down, the squeeze will feel even tighter with new foreigner only casinos on the horizon.

Fitch said: “Gambling volume from Chinese players has been on the decline amid the corruption crackdown and slowing economy. The 16 existing foreigner-only properties saw aggregate casino revenue decline by 10 per cent in 2015. Still, the sole casino allowed to cater to locals (Kangwon Land) continues to see solid growth. Fitch believes chances that locals will be allowed to gamble elsewhere in the medium term are remote based on our conversations with the country’s officials and incumbent operators.”

Mohegan Sun’s Integrated Resorts will boast a 1,350 room hotel, a Paramount Studios-themed amusement park, and a 20,000 square meter casino with 250 gaming tables and 1,500 slots.

Fitch hasn’t completely ruled out its success.

“We believe the Incheon projects could be viable if the total number of projects moving forward remains modest and Japan’s effort to legalise casinos fails to materialise,” it said. “Incheon International Airport is one of the most heavily trafficked airports for international passengers in the world. By comparison, the Philippines has been able to develop a modest sized international gaming business despite its poor infrastructure. Additional benefits for expansion in Korea include low taxes and no restrictions on locals participating in non-gaming amenities. Non-gaming amenities such as retail and entertainment will appeal to the approximately 25m people living in the greater Seoul area.”

Mohegan Sun expects to spend around $100m in equity on the project, funded following a $100m unsecured note issuance in November 2015.

Fitch commented: “We view the project as neutral to MTGA’s credit profile, as the funds could have been utilised to repay higher coupon debt and partially address the $1.1bn 2018 maturity wall. The maturity wall could be eased if certain conditions are met, most notably the 11 per cent subordinated notes being refinanced. On the other hand, some of the equity could potentially be recouped through a development fee. Further, a management fee arrangement is likely and could provide some downside protection against possible lackluster performance. The project faces some execution risk, as South Korea is a new market for the US tribal operator and Paradise/Sega Sammy’s nearby integrated resort will be first to market in 2017. That said, the project, if successful, has significant upside for MTGA.”

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