Moody’s Investors Service Inc has revised to “negative” from “stable” the outlook of Studio City Finance Ltd’s B2 corporate family rating and B3 senior unsecured rating.
Studio City Finance has developed and operates – via one of its units – the Studio City project, a new US$3.2-billion casino and entertainment resort (pictured) in Macau that opened on October 27.
“The revision in the outlook reflects Moody’s concerns that a lower-than-expected allocation of only 250 gaming tables to the Studio City project will restrain the company’s ability to generate cash flow, which will in turn weaken its liquidity and delay its process of deleverage,” Kaven Tsang, a Moody’s vice president and senior credit officer, said in a press release on Monday.
The ratings house added that Studio City Finance’s adjusted debt to EBITDA (earnings before interest, taxation, depreciation and amortisation) ratio “will be around 8x in 2016 – which weakly positions it at the B2 rating level – before it improves to around 5.5x to 6.0x in 2017”.
Moody’s said that although Studio City Finance had US$853 million in cash as of June 30, including restricted cash, “we expect liquidity to become tight over the next 12 months, unless the US$100-million revolving credit facility remains available, but which is uncertain… If liquidity becomes tight, such a situation could necessitate additional funding to meet the payments of principal and interest.”
Moody’s Mr Tsang stated that the allocation by the Macau government of 250 new-to-market live gaming tables for Studio City – compared to the resort management’s hoped-for 400 tables – would in likelihood “lead to the breach of some of the covenants on its US$1.4-billion secured credit facilities”.
Melco Crown Entertainment Ltd – 60 percent owner of the Studio City project – revealed in an April filing that it might technically fall into default on an approximately HKD10.86-billion (US$1.4-billion) Studio City project loan if it is unable to open to the public its majority-owned Cotai casino resort by October 2016 “with a minimum 400 gaming tables available for operation”.
In a press release on October 20 announcing Studio City’s new-to-market table allocation, Melco Crown said it was “proactively” seeking amendments to the terms of its senior credit facilities. In August, the company said one of its subsidiaries was already preparing a “contingency plan” ahead of any gaming table allocation decision by the Macau government.
Melco Crown undervalued
In a note on Wednesday, brokerage Sanford C. Bernstein Ltd in Hong Kong described Melco Crown – a developer of casinos in Macau and the Philippines – as “one of the most undervalued (and misunderstood) companies in the Macau gaming universe with outsized growth potential”, due to its mass-market appeal.
The brokerage’s team of Vitaly Umansky, Simon Zhang and Bo Wen added that with the opening of Studio City, the institution forecast that between 2015 and 2018 the compounded annual growth of Melco Crown’s EBITDA would be 25 percent compared to Sanford Bernstein’s 18.5 percent estimate for the Macau market as a whole.
The brokerage added that catalysts for growth in Melco Crown’s stock include “a ramp up of Studio City, potential acquisition of the 40 percent JV [joint venture] partner in Studio City, recovery in mass, and City of Dreams Manila taking market share in the faster growing Philippines gaming market”. Those were references variously to: New Cotai LLC, the minority equity partner in Studio City; likely recovery in the mass gambling market in Macau after 17 months of casino revenue decline in the city; and to a new casino resort operated by Melco Crown that opened in the Philippines capital Manila, in February.
Moody’s noted in its Monday press announcement that mitigating factors regarding concerns on Studio City Finance’s credit outlook included the fact the resort had opened on time and on budget, and that the majority partner Melco Crown has experience in managing gaming and non-gaming business in Macau.
The ratings house stated: “The Studio City project emphasises… cinematically themed non-gaming activities and mass-market gaming, which is less volatile [in revenue] when compared to VIP gaming business.”
Moody’s said Melco Crown together with New Cotai LLC – a holding company controlled by private equity sponsors – had contributed US$1.25 billion through equity, shareholders loans and completion guarantees to the project.
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Summit Ascent, lead developer of Tigre de Cristal