Star Entertainment: Share price plummets as casino warns of cash shortage

Casino operator Star Entertainment looks to be on life support as the company warns it has just $79 million in cash left to pay its bills.

Shares in the beleaguered casino group, which runs casinos in Sydney, Brisbane and on the Gold Coast, plunged to a record low Thursday, down 25 per cent as markets digested the news that it may not meet the necessary conditions to access a desperately needed $100m debt lifeline.

In a release to the stock exchange after the close of markets last night, Star warned that its available cash had fallen by $70m in the three months to 31 December, and that conditions “remained challenging” for it to draw down the second of two emergency tranches of debt of $100m each.

If it can’t meet the conditions to receive that debt facility, the company could be forced into administration, affecting its estimated 9,000 employees.

The company revealed it had spent $107m in the three months to December, including burning $37m of the first $100m debt facility it secured in September last year to avoid collapse.

Facing regulatory hurdles and fines linked to a series of scandals involving the concealment of criminally-linked junket operators, operation of a secret gambling room, and regulatory breaches that saw it almost lose its NSW licence, the company has been bleeding cash amid a collapse in high-roller revenue and a reduction in takings from its gaming floor. The company is also strained by debt repayments for its costly multi-billion dollar development of Queen’s Wharf Brisbane casino precinct. It is still yet to be issued with fines of potentially $150m from regulator AUSTRAC over breaches to money laundering and terrorism financing laws.

While facing those challenges, it has failed to capitalise on what should have been one of the busier trading periods heading into Christmas, Star warned.

“The reduction in available cash reflects the continued difficult trading conditions, essential capital expenditure, significant items including upfront fees relating to the establishment of (new debt), the first $5 million instalment of the $15 million fine imposed by the NSW Independent Casino Commission, significant legal and consulting fees, (and) ongoing transformation and remediation activities,” Star advised.

With just $79m left in the bank, and at the existing spend rate of more than $30m per month, Star has a matter of months to turn the situation around.

Investment bank Jefferies told clients that conditions for Star were unlikely to improve and that access to the next $100m tranche of its the debt facility would be critical for Star’s short-term survival.

“Without access to funding, we see a significant liquidity issue,” Jefferies said in a note to clients.

The bank noted Star’s language that conditions remain “challenging to meet”, which suggested it would struggle to raised $150m of capital, a requirement to trigger the second tranche of debt.

However, a capital raise appears increasingly unlikely given the parlous position of the Star’s finances, and the Casino operator’s largest shareholder - pub and pokies king Bruce Mathieson - said he was unwilling to inject any more money into the venture until the scale of the AUSTRAC fines are known.

“No one will put in any more money until they know what those fines are going to be,” Mr Mathieson told The Australian. “So it either goes bankrupt or someone buys it. No one wants that, including the government.”

In its update to the market, Star said “continues to explore other liquidity solutions,” to generate additional cash.

New financing aside, Jefferies’ view was that the current net debt to earnings of 11 times far exceeded a desired ratio of 2 times, and that company would need an additional $830m in cash to get debt to a manageable level. Star needs to refinance $1.6bn of debt for the Queen’s Wharf precinct in Brisbane by the end of year.

It saw little likelihood of sufficient revenue generation, and warned that Star would still see “significant underlying earnings pressure.”

“We see no catalyst for an improvement in earnings in the short term,” the bank said, with limited cost-cutting opportunities, cashless gaming rollout in Queensland and most importantly, a $1,000 cash limit to be introduced in NSW in August.

“Trading conditions in Sydney in particular are the most challenged... and this will make any earnings recovery significantly more difficult on a longer-term basis.”

Under Anti-Money Laundering and Counter-Terrorism Financing laws, customers at Star and Crown can be required to provide their full details as well as complete a ‘source of wealth check’ to verify the economic, business, or commercial activities that generated a gambler’s net wealth. It appears that tradies and other gamblers are reluctant to identify the source of their funds to gamble at casinos Star, or Crown, instead opting to take their cash to suburban league clubs where the different rules apply.

The shift to cashless gaming has had a substantial impact on revenues, reducing average daily revenue by more than 15 per cent at the Star Sydney.

Unless a white knight investor comes forward in the next few months, Star will be forced into administration, and left with few options other than selling its one or more of its assets, including its stake in the $2bn Gold Coast development, The Star Sydney, or its hotel.