Moody’s Investors Service Inc has assigned a ‘stable’ outlook to Melco Resorts Finance Ltd and Studio City Finance Ltd. The opinion reflects the institution’s view that those respective financing entities linked to the Melco casino brand would continue to see recovery in earnings in Macau and improving financial leverage over the next 12 to 18 months.
But Moody’s anticipated Studio City Finance – tied to the Studio City casino complex in Macau’s Cotai district that is majority-owned by Melco Resorts – would not pay dividends for at least “the next one to two years”. That was because of its still-high leverage after acquiring debt finance to support capital spending following the Covid-19 pandemic. The institution conceded however, that Studio City Finance had “never paid dividends in its history”.
In a Wednesday update, Moody’s noted it assigned Melco Resorts Finance – 100-percent owned by Melco Resorts & Entertainment Ltd, which runs casinos in Macau, the Philippines and the Republic of Cyprus – a ‘Ba3′ corporate family rating.
“Melco Resorts & Entertainment’s adjusted debt/EBITDA [earnings before interest, taxation, depreciation and amortisation] will improve to 5.2x to 6.2x over the next 12 to 18 months from 8.6x in 2023,” suggested Moody’s.
This would be because “the recovery in Macau’s gaming market after China’s reopening in early 2023 will drive higher earnings and debt reduction”.
The ratings agency added: “The projected leverage supports Melco Resorts Finance’s Ba3 rating.”
Moody’s expected the Melco Resorts parent would see continued improvement in adjusted EBITDA this year and next, as the shift in the Macau market’s mix towards premium mass and direct VIP gaming segments would benefit the group’s properties in the city.
“We expect the company’s [Melco Resorts’] adjusted EBITDA to further improve to around US$1.2 billion in 2024 and US$$1.3 billion in 2025, from US$0.9 billion in 2023. The pre-pandemic level in 2019 was US$1.5 billion,” the ratings agency noted.
Moody’s also commented that Melco Resorts had “very good” liquidity, with US$1.1 billion in cash, excluding restricted cash, as of June-end. It also had US$1.9 billion via a revolving credit facility as of that date, according to second-quarter earnings call commentary by Geoff Davis, the casino group’s chief financial officer.
Moody’s observed: “These liquidity sources will be sufficient to cover Melco Resorts & Entertainment’s cash needs through at least the next 18 months.”
“The company has extended the maturity of its US$1.92 billion credit facilities by two years to April 2027 from April 2025. It also issued US$750 million in eight-year bonds in April, fully addressing Melco Resorts Finance’s debt maturities through the end of 2025,” said Moody’s.
Studio City uplift
In credit opinion commentary the same day on Studio City Finance, Moody’s noted a ‘B1’ corporate family rating, with a ‘stable’ outlook. Melco Resorts owns 55 percent of New York-listed Studio City International Holdings Ltd, the promoter of Studio City, and the holdings entity wholly owns Studio City Finance.
“Studio City Finance’s standalone credit profile reflects its established market position and its mass market-focused operations,” remarked Moody’s.
The likelihood of support from the Melco Resorts parent is also part of Studio City Finance’s credit strenghts, the ratings agency flagged.
“We expect Studio City Finance’s adjusted debt/EBITDA to improve to 6x-7x over the next 12-18 months, because the recovery in Macau’s gaming market after China’s reopening in early 2023 will drive higher earnings and debt reduction.
“The projected leverage for 2025 supports Studio City Finance’s B1 rating,” added Moody’s.
It has also noted: “With the completion and opening of Studio City Phase 2 expansion in 2023, and as operating cash flow increases, the company will start generating free cash flow in 2024, which will reduce its adjusted net debt by around US$200 million by year-end 2025, compared with year-end 2023.”
Studio City Finance’s adjusted debt – including lease liabilities – had been at US$1.5 billion as at the end of 2019. The company’s adjusted debt level then peaked at US$2.4 billion at the end of 2022 as the business environment was pressured by the impact of the Covid-19 pandemic, and it funded its capital spending with additional debt.
Studio City Finance’s adjusted debt later went down to US$2.2 billion as of June-end.
