Moody’s Investors Service has changed to ‘stable’ from ‘negative’ the outlook on Macau casino operator SJM Holdings Ltd, with the same adjustment on a group of companies controlled by casino developer Melco Resorts & Entertainment Ltd.
The improvement in each case was supported by a “strong recovery” in Macau’s casino gross gaming revenue (GGR) since the relaxation of measures against Covid-19 in early January, stated the institution in separate notes published on Thursday.
The Melco group of companies cover Melco Resorts Finance Ltd, Studio City Finance Ltd, and Studio City Co Ltd. Moody’s also affirmed Melco Resorts Finance’s “Ba3” rating, Studio City Finance’s “B1” rating, and the “Ba3” rating on the U.S. dollar senior secured bonds issued by Studio City Co, the latter a wholly owned unit of Studio City Finance.
The institution also affirmed SJM Holdings’ “Ba3” rating, according to the memo on the latter group.
Gloria Tsuen, a Moody’s vice president and senior credit officer, said in prepared remarks that the “outlook change to stable from negative” reflected the rating agency’s expectation that the financial leverage of both the Melco group and SJM Holdings “will improve significantly in the next 12 to 18 months, driven by a robust recovery of the gaming market in Macau.”
Regarding SJM Holdings, the improvement was also supported by the “ramp-up of the company’s new property,” Grand Lisboa Palace (pictured) in Cotai, stated Moody’s.
According to the institution, Macau’s casino GGR “has recovered strongly since China’s reopening in early January this year, with mass and VIP segments recovering to 93 percent and 38 percent, respectively, by the third quarter of 2023 compared with the same period in 2019”.
Macau’s casino GGR for the ten months to October 31 reached MOP148.45 billion (US$18.49 billion), 315.6 percent from the comparable 2022 period.
Moody’s estimates that Macau’s market-wide mass-segment GGR will return this year “to about 85 percent” of the 2019 level, and “fully recover in 2024, driven by premium mass customers”.
VIP segment GGR will “likely return to 32 percent to 36 percent of the level in 2019 in 2023-24, as direct VIPs replace part of the business lost following regulatory restrictions on the operation of junkets in recent years,” stated the institution.
The ratings agency said it expected the group parent Melco Resorts, along with Studio City Finance, to “start generating free cash flow” that could “help materially reduce their debt and leverage over the next 12 to 18 months”.
“Melco Resorts and Studio City’s mix shift toward premium mass and direct VIP customers will also increase their margins because these two customer segments are more profitable compared with general mass and junket-introduced VIPs,” it added.
Moody’s estimates that the parent’s adjusted earnings before interest, taxation, depreciation and amortisation (EBITDA) “will increase to about US$0.9 billion in 2023 and US$1.3 billion in 2024,” while Studio City Finance’s adjusted EBITDA “will also turn positive in 2023 and increase further to around US$0.3 billion in 2024”.
For SJM Holdings, as the Macau market recovers, the group’s Grand Lisboa Palace complex should “significantly increase its earnings and operating cash flow,” helping the casino firm generate free cash flow.
Moody’s estimates that SJM’s adjusted EBITDA will improve to about HKD1.9 billion (US$243.7 million) in 2023, HKD4.2 billion in 2024.
“SJM’s mix shift toward mass customers from VIP customers, and toward self-promoted casinos from satellite casinos, will also increase its margins because the two segments are more profitable,” added the ratings agency.
