Lavish Casino Bet Comes Up Short for Wall Street Investors

(Bloomberg) -- It’s due to feature $1,500-a-night French Baroque suites with marble Roman baths for eight, and 30 custom red Rolls Royces to squire around its guests -- all part of what’s promised to be the world’s most luxurious casino and hotel aimed at China’s ultra rich. 

Yet The 13 Hotel stands empty in a sleepy corner of Macau while its owners seek more cash and the necessary permits to operate -- not to mention an elusive license to open a casino. After missing a crucial creditor’s deadline this week, the red tower standing a short drive from the Cotai Strip remains blocked by construction materials, with no plans to open until late this year.

The fate of 13 Holdings Ltd.’s $1.6 billion wager is anything but assured -- and that’s causing a headache for its big-name investors, including Janus Capital Group Inc., Fidelity International Ltd., Omega Advisors Inc., the Ontario Teachers’ Pension Plan and Steve Cohen’s SAC Capital Advisors, who all took sizable stakes in the company after the project was announced in November 2012. While some benefited from a negotiated price of HK$0.68 a share through a placement, all have watched the stock price dive 92 percent from its 2013 high to just barely above penny-stock status.

"Some of the original investors had already taken haircuts to exit the project, and they were the fortunate ones," said Ben Lee, a Macau-based managing partner at Asian gaming consultancy IGamiX. "The project needs more equity, as they are already up to their leverage ceiling, and future fundraising will only continue to dilute the shareholding."

Ontario Teachers sold its stake in February; a spokesman declined to comment on the investment. Cohen’s SAC had bought an 8.8 percent stake in the company in January 2013; Point72 Asset Management, which took over SAC’s assets in 2014, declined to comment on the holding. Spokesmen for Janus and Fidelity also declined to comment. Omega’s founder Leon Cooperman also declined to discuss the company’s 17 percent holding except to reply in an email that it’s "a very small position for the firm." 

A spokeswoman for 13 Holdings confirmed it’s still seeking operating licenses, is in the final stages of completing the hotel, and planned to open by the end of the year. She declined to comment on the company’s financial situation, debt obligations or likelihood of being able to open a casino.

Back in 2013, Wall Street investors saw one of their own at the helm: the flamboyant and wild-suit-wearing former co-head of Asian investment banking at Merrill Lynch some 25 years ago, Stephen Hung, who’d married a Mexican former model with a resemblance to Audrey Hepburn and frequent appearances on Hong Kong’s social scene -- often dressed in striking red, and riding in a hot pink Rolls Royce with the license plate "Deborah."

Hung at first named the company Louis XIII Holdings Ltd., evoking the French king’s ornate splendor, and talked about recreating the Palace of Versailles on Macau’s Cotai Strip, featuring 200 "villa" rooms with private elevators, Baroque-style furniture, velvet-canopied beds and 24-hour butler service. The top-level VIP suite would cost more than HK$1 million a night. At big gala dinners for potential investors, Hung spoke of cashing in on Macau’s status as the biggest gambling hub in the world, able to draw billions of dollars from China’s wealthy.

"It was very glamorous, gave a good impression about the future hotel, about the future of the company, as Stephen Hung is a very stylish, outstanding person," said Dickie Wong, executive director of research at Kingston Securities Ltd., who attended such a dinner and noted Hung’s impeccably matched clothes and that he travels in a Rolls Royce. "He gives the impression that he can build a very luxurious hotel because he has the idea, and he has the clientele base."

Investors also counted on 13 Holdings’ majority ownership of Paul Y. Engineering Group Ltd., which built Hong Kong’s Mid-Levels escalator and Cross-Harbour Tunnel, along with hotels and office towers including Cheung Kong Center, generating HK$7 billion revenue annually.

But 13 Holdings is now facing a far more challenging environment. China’s crackdown on corruption scared away Macau’s VIPs and sent casino revenue into a slump starting in 2014. As its cash trouble became apparent earlier this year, 13 Holdings announced it would sell its 52 percent stake in Paul Y. Engineering to a business partner for just HK$300 million, a roughly 35 percent discount on the book value, according to the company -- to raise money to buy furniture and fixtures and pay other expenses for the hotel.

"This hotel was exceptional in that it was positioned in the ultra-stratospheric segment," said IGamiX’s Lee. "That market segment has long disappeared in the aftermath of the anti-ostentation campaign, and it’s a wonder they never revised their business plan and structure when they still had the opportunity to do so."

Despite several share placements to raise money as well as a number of loans, 13 Holdings faces a funding shortfall of about $400 million, according to people familiar with the matter. 

The bulk of assets, including the 30 custom Rolls Royce Phantoms acquired in 2014 for $20 million in the largest single commission in Rolls Royce history, have been pledged to creditors, who’ve extended about HK$4.5 billion. Some HK$3 billion of that is said to be owed to China’s Bank of Communications Co., which had given the hotel until July 31 to open as a condition of the loan. BoCom declined to comment on the lending. 13 Holdings has yet to update investors on negotiations with another lender to extend a July 12 maturity on a separate HK$300 million loan. The hotel was originally due to open in 2016.

Meanwhile, Hung, whose title is executive director and joint chairman, has received HK$51.7 million in payments over last five years from 13 Holdings, which also paid $HK2 billion for the land the hotel is built on to a company owned by his son. Hung wasn’t available for an interview, according to the company.

Casino License

More than four years after the project began pulling in investors, 13 Holdings has yet to attain a gaming license. A tentative partnership with Melco Resorts & Entertainment Ltd. that would have enabled 13 Holdings to operate gaming tables, has fallen through amid tightening restrictions in the gaming hub, according to people familiar with the matter. A Melco spokeswoman said the company, one of six current casino operators in Macau, is currently focused on its own operations.

Already, casino hotels have been cutting rates as more supply becomes available, and VIP gamblers typically prefer to stay where they can play, said Margaret Huang, a Bloomberg Intelligence gaming and hotels analyst.

"If the property operates as a standalone hotel, it may be difficult to justify room rates to match its high-end focus," she said. "Without a casino, it would be nearly impossible to have gamblers book rooms separately with them."

Macau’s government tourism office, which is responsible for issuing hotel-related licenses, said 13 Holdings’ license applications “are still being processed” and that it hasn’t received an application for inspection from The 13 Hotel, which should be made when the hotel is ready to open.

With Macau’s government encouraging entertainment operators to shift away from a focus on VIP gambling to develop the city more broadly with non-gaming attractions, S&P Global Ratings analyst Sophie Lin said it’s now "more difficult, if not impossible, for new casinos to obtain" approval to operate. The ratings agency predicts "a material deceleration of the VIP gaming revenue growth in the second half of 2017," she said -- despite an ongoing rebound in Macau’s overall casino revenue.

After 13 Holdings latest earnings report, a company controlled by Charles Chan purchased Paul Y. Engineering, the company’s main revenue-generating asset. Nicknamed the King of Shell Companies by the Hong Kong media, Chan had previously been the majority shareholder of 13 Holdings’ predecessor and continues to control a 16 percent stake. Chan’s ITC Properties Group Ltd. declined to comment on the transaction.

Shares have slumped 58 percent to a low of HK$0.78 in the two weeks after the company announced the asset sale as investors digested the news. 13 Holdings dropped as much as about 4 percent Wednesday in Hong Kong.

Those in the industry are watching whether Chan will take over 13 Holdings as well, said IGamiX’s Lee. Another option would be to sell to an existing gambling operator with a license in Macau. Or simply open, enlist a casino partner and hope for revenue, Lee said.

"People might have been very bullish because in the past, some of the Macau gaming companies also started from scratch in the beginning and became large," said Kingston Securities’ Wong. "There’s nothing you can do for long-term investors who invested a couple of years ago. They can only wait and see."

--With assistance from Kana Nishizawa David Yong Andrew Monahan Denise Wee and Annie Lee

To contact the reporters on this story: Daniela Wei in Hong Kong at jwei74@bloomberg.net, Robert Olsen in Hong Kong at rolsen22@bloomberg.net.

To contact the editors responsible for this story: K. Oanh Ha at oha3@bloomberg.net, Sheridan Prasso