Fitch Ratings Inc has downgraded Universal Entertainment Corp’s long-term issuer default rating to ‘CCC+’ from ‘B’, on what it said were risks regarding the company’s liquidity, given the potential for “further deterioration” in the group’s casino business. ‘CCC’ levels indicate a substantial credit risk, with the probability of default.
A subsidiary of Universal Entertainment, which is a Japanese gaming conglomerate, operates the Okada Manila casino resort (pictured) in the Philippines.
In Monday’s note, the ratings agency said it was also downgrading Universal Entertainment’s outstanding U.S. dollar senior secured notes to ‘CCC+’ from ‘B’ with a recovery rating of ‘RR4′, meaning a “very weak” rating with an “average” recovery assessment.
“The downgrade reflects our view that unless the company’s free cash flow improves significantly in the second half of 2021 or additional funding is raised, Universal Entertainmentmay have insufficient liquidity to meet the repayment of US$118 million (about JPY14 billion) senior secured notes due in December 2021,” stated Fitch.
The institution said it believed “there is a risk of prolonged free cash flow weakness” amid the Covid-19 pandemic uncertainty, and the “risk of further deterioration” in both the group’s casino and the amusement equipment businesses.
It added: “Universal Entertainment is highly exposed to the pandemic as operator of the Okada Manila, the largest integrated casino resort in Manila’s Entertainment City, and in its Japanese amusement equipment business, which produces and sells pachinko and pachislot machines in Japan.”
Okada Manila reported gross gaming revenue of nearly PHP5.10 billion (US$1.05 billion) in the first quarter of 2021, down 41.0 percent from the prior-year period. The resort’s adjusted segmental earnings before interest, taxation, depreciation and amortisation (EBITDA) were PHP692 million in the opening quarter of 2021, down 35.3 percent from a year ago.
Fitch noted that the recovery in the casino business could be hampered by “travel restrictions, outbreaks and further lockdowns”.
“Failure to achieve a turnaround in operations could lead to further cash burn and deteriorating liquidity, and inhibit Universal Entertainment in securing external funding, leading to further stress on business and credit profiles,” stated the ratings agency.
The Japanese group is said to be looking at several options to shore up liquidity, including apotential listing of its Philippine-based casino business or a refinancing.
Universal Entertainment announced earlier this year a plan for stock-market listing in the United States of Okada Manila, via a special-purpose acquisition company.
In Monday’s memo, Fitch said “considerable uncertainty exists” over these options because Universal Entertainment is “vulnerable to pandemic-related disruptions.”
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