Moody’s Downgrades Imperial Pacific’s Credit Rating Due to Inability to Collect VIP Debts

Best Sunshine Live - Moody's Rating - Imperial Pacific

A year ago, Best Sunshine Live’s financials looked fantastic. The reality of unpaid debts has shattered that impression.

Moody’s Investor Service cut the rating on Imperial Pacific International Holdings on Thursday, due to concerns about the company’s ability to collect on high-roller debts. Moody’s set the investor service’s rating to Caa1. It is the second time in three months Moody’s has downgraded the rating.

In its report on the IPI’s ability to collect debts from gaming at its temporary gaming operation on Saipan, Sunshine Live Casino, Moody’s said that the Saipan-based casino is at “very high” risk of defaulting on its debts. The report suggested a further downgrade was likely in the medium term.

2016 Annual Report on Imperial Pacific

The decision to downgrade was based in part on Imperial Pacific’s 2016 annual report, which included a ledger of dubious debt transactions. IPI has a growing volume of bad debt writeoffs. The company wrote off $38.6 million in bad debts last year.

Imperial Pacific took another $109 million in impairments on other debts in that time. Yet another $135.1 million is over 7 months overdue. Collecting debts from Chinese high-rollers is a difficult prospect even for Chinese casinos, so a resort based on a US island presumably would have even more difficulties, though Imperial Pacific is listed on the Hong Kong Stock Exchange.

Imperial Pacific’s Huge Turnover

Best Sunshine Live’s best month was April 2016, when it had e $3.2 billion in VIP turnover. That number had fallen to $1.55 billion in August 2016, perhaps due to an unwillingness to accept bets from high rollers who failed to pay their previous gambling debts. Or it might have dawned on IPI’s executives that it would be hard to collect on many of those gambling debts from April.

It was the infamous difficulty in collecting debts in Mainland China that caused Macau’s casinos to set-up the junket operator system. Macau casinos are unable to sue for unpaid debts on casino markers the way Las Vegas or Atlantic City casinos can sue.

Chinese Junket Operators

Instead, Macau rented space to junket operators, who arranged for high rollers to visit Macau and organized high stakes gaming sessions in private rooms in the casinos. The junket operators would pay a fee for use of the facilities, which usually was a percentage of revenues. The junkets were responsible for collecting debts on the mainland. It long was rumored they used triads to collect debts through extralegal means, but Macau casinos did not have to concern themselves with the collection of debts.

At the moment, the Commonwealth Casino Commission of Saipan has approved only one junket operator for Imperial Pacific’s casino: South Korea’s Big Bang Entertainment. The commission’s executive director, Edward Deleon Guerrero, said in September 2016 that no limit has been set on the number of junket operators which would be allowed. At the same time, Mr. Deleon Guerrero said that the vetting process for the junket operators is laborious. No reviews have been completed in the 7 months since.

Best Sunshine Live Casino

Best Sunshine Live operators out of a high-end shopping mall at the moment. Meanwhile, the permanent casino is under construction, though that development recently received unwonted attention from the US authorities when the FBI raided the company’s offices. The raid happened after a worker died during construction. ICE began investigations on whether undocumented workers were trafficked from China.

Also, the Calvin Ayre website reported that Best Sunshive Live was facing a serious cash flow shortage as late as February 2017. At the time, controlling shareholder Cui Liij bought $100 million of Imperial Pacific company bonds in order to keep the casino in business.

Mark Brown Boasted of Enhanced Vetting

IPI exec Mark Brown previously suggested that Best Sunshine Live could handle its own VIP markers, because of its enhanced vetting abilities. Moody’s Ratings Service does not believe in those abilities, as its report suggested that the bad debt writeoffs, impairments, and overdue payments are “indicative of its weak management of accounts receivables”. Moody’s questioned whether the current plan is sustainable, as it suggested in the report that it questioned the “liquidity position and the sustainability of its business model”.

Eventually, the debt collection problems might be settled by the inclusion of more junket operators. The revenue stream for IPI would be considerably less, but they would be reliable. The Saipan Tribune reported that the Commission is reviewing 17 different licenses. Assuming a handful of those applicants meet the standards of the American legal system, then the successor to Best Sunshine Live casino should have an alternative to casino markers.

Imperial Pacific Casino

“Markers” are the system used in much of the world for high stakes credit. VIP high rollers don’t want to carry a bunch of cash, so casinos offer most people who plan to gamble more than $10,000 “markers”. These act as IOUs for the high roller. In Las Vegas, casino operators can prosecute anyone who does not pay the IOU — not paying such debts is a criminal matter. That system will not work with Chinese high rollers, as the Moody’s report suggests.

When the permanent casino is finished, it will be called Imperial Pacific Casino, taken from the name of the corporation traded on the Hong Kong Stock Exchange. Originally, the name was marketed as “Grand Mariana Casino and Hotel Resort”, but that was changed in mid-2016.