The hidden flaw in Steve McCann’s plan to rescue Star casino
The reality is, the new CEO has very few levers to pull as the casino struggles to trade out of its mounting problems.
Among the many problems Steve McCann faces in bringing the deeply-troubled Star Entertainment back from the financial brink, the biggest by far comes down to cash. Or the lack of it on the casino floor.
A drive by NSW to clean up its casinos through cashless gaming and cash limits, with Queensland committed to follow, represents the cure that is killing off the patient. These rules, which will only get tougher as they are rolled out in the coming year, represent the hidden flaw in McCann’s plan to rescue Star.
Already higher regulatory hurdles and identity checks have been turning casual punters away from Star’s Sydney casino. The pokies traffic is flooding to well-established leagues and social clubs. The re-basing of the casino business is laid bare in Star’s latest numbers.
Star’s Sydney revenue has been steadily falling over the past year and is now around a third lower. And the ever-rising regulatory and supervision costs that are being heaped onto Star mean its flagship Sydney casino ran at a loss in July and August. Group earnings were down 45 per cent to $175m on the year. Star’s second half numbers were down 46 per cent on the first half.
The release of the results saw Star’s shares resume trade on Friday after a month suspension. They dived as much as 44 per cent giving it a market capitalisation of $630m a discount to net assets of $830m.
The move to mandatory carded play and $5000 cash limits started last month across Star’s premium Sydney gaming floors. In those four weeks revenue is down another 11 per cent. McCann is bracing for further losses with the full rollout of cashless play next month across the entire Sydney gaming floor. Then the cash limit in Sydney will drop to $1000 by this time next year. Queensland, home to Star’s new hope, also plans to move to card-based play.
At this rate the changes mean Star isn’t generating the cash needed to pay its daunting one-off construction bills and fines, let alone service its high-cost debt load. Crunch.
This is the scale of the many existential problems confronting McCann at Star.
The scramble to secure emergency financing from his bank lenders is another. The highly conditional and additional security sought for the $200m financing package that its banks reluctantly agreed to speaks volumes about their lack of confidence in Star’s future.
After delivering a thumping $1.69bn full-year loss, McCann conceded Star is a business that “has clearly been on its knees”. However, he thinks with a well-executed plan Star can emerge from the other side, although it is heavily dependent on more asset sales and the earnings at least stabilising.
“I think this is really a story of the competitive environment that has changed dramatically,” McCann says. This is through a combination of tighter regulations and higher costs.
Banks in charge
However, it’s the bankers that are running the show for now at Star with the casino on the tightest leash and a punishing step-up in interest rates to junk bond territory in order to stay afloat. This was the agreement struck to secure the cash needed to pay the most immediate bills to complete its new massive Brisbane Queen’s Wharf site.
Star finally released its accounts, with the messy numbers dragged down by writedowns on its Brisbane, Sydney and Gold Coast properties. It was hit with surging regulatory costs and challenging trading conditions. There too was a going concern warning from Star’s auditors, which have not yet signed off on the full year accounts.
After nearly two months of painful talks, Star this week signed off on an emergency $200m highly-conditional debt facility with its banks led by Westpac and Barclays.
Star’s lenders reluctantly tipped in more funds to avoid the mess of a new class of senior lenders trying to trump the bank’s security on the assets. The additional funds were needed to avoid the prospect of administration all together. Through the process, Star’s board has been getting advice from restructuring specialist FTI to ensure it was acting within the guard rails of the safe harbour rules. Star has been dealing with 11 lenders in the consortium including Macquarie, investment bank Deutsche Bank.
The new facility is as harsh as it is necessary. The $200m will be released over two tranches and comes with an interest rate of 13.5 per cent. At the same time the Star’s existing $450m debt facility has been slashed and the 6.5 per cent interest rate over that loan has been reset to match the 13.5 per cent rate.
Significantly, the new loan agreement now puts the banks right in the room against the NSW casino regulator, the NICC. And the interest of the banks and the regulator are far from aligned, including on the long-term status of Star’s NSW licence.
The debt facility agreed to by Star’s McCann and his board reflects a company with zero alternative. There’s little to no flexibility to help the casino through any more unexpected economic or regulatory shocks.
For Star, borrowing money was the least worst solution to its cash crunch. An equity raising was far too expensive given the state of Star’s shares. More equity would have also wiped out any value investors had left in Star.
The first batch of funds involves more security over Star’s prime hotel properties and other non-gaming assets. The near $70m cash from the recent sale of leasehold agreement to Star’s older Treasury Brisbane building is to be used as security.
The second tranche of the loan will be available from the end of December and relies on the receipt of Star’s long-term strategy, long-term financial forecasts and raising additional $150m in subordinated funds, which is expected to be in the form of a junk-priced convertible bond.
The new debt agreement underscores the other big problem for Star’s McCann. He doesn’t run the Star’s casinos in Sydney or Brisbane and therefore has limited control over costs.
Those casinos and the costs are under the responsibility of the special manager Nick Weeks.
Weeks’ responsibility had been implied over the past two years, but that was made crystal clear through the findings of the recent Bell inquiry.
Then there is the fact that Star is totally at the whim of the NSW Independent Casino Commission. Demands for more supervision and regulatory programs have driven up costs to the point where operating expenses as a percentage of revenue have grown to 75 per cent from 59 per cent a year ago.
McCann is responding with job cuts of 350, or almost a third of corporate roles. However his regulators are demanding more costs and consultant fees to be added in the business. There too are job guarantees under casino tax agreements.
Despite the deep financial pressures Star faces, McCann says he is still conscious the casino needed to develop the “best possible relationship” with regulators.
McCann too is prepared to sell the core of the business with $300m in hotels earmarked to be put on the block including Sydney’s Darling. The new CEO has also considered flogging Star’s car parks, although he concedes they are good money-spinners.
Star now faces more cost blowouts on the new Queen’s Wharf Brisbane casino joint venture with its contribution running at $180m over the next two years. It has $105m in more remediation and regulatory costs in the coming year, and is facing a $300m-plus fine from financial crimes agency Austrac as well as a stinging, although yet to be decided, fine from the NSW casino regulator. Currently Star has $130m in the bank and limited and highly conditional funding. That’s even before considering its day-to-day running costs as well as serving debts.
To be fair to McCann none of these problems are his doing. But it’s his mess he has agreed to try and fix. And given the scale of Star’s issues it is stunning that the NSW regulator is dragging its feet in giving the right approvals needed for the former Crown Resorts boss to be named permanent CEO. In another of many absurdities McCann on Thursday was only able run through the release of Star’s much-delayed accounts to investors as an “observer”.
McCann has very few levers to pull and a lot needs to go right for his Star rescue to have any hope.
johnstone@theaustralian.com.au
Originally published as The hidden flaw in Steve McCann’s plan to rescue Star casino
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