Fitch Ratings Inc has downgraded Japan-based Universal Entertainment Corp’s long-term issuer default rating to ‘B’ from ‘B+’ and the senior secured rating to ‘B’ from ‘B+’. It added that the rating outlook for the firm which promotes the Okada Manila casino resort (pictured in a file photo) – currently shuttered due to Covid-19 – was “negative”.
The downgrade was driven by “increasing risks” to the parent’s earnings and cash flows “as a result of the coronavirus pandemic”.
Fitch noted: “The gaming sector is highly exposed to the outbreak and Universal Entertainment’s vulnerability is exacerbated by its single-location focus and its lack of a track record in casino operations as its integrated resort in the Philippines, the Okada Manila, is still in the ramp-up phase.”
Operations at Okada Manila have been suspended since mid-March amid the Covid-19 infection threat. In mid-April Universal Entertainment had said that the pause – then due to last until April 30 – was likely to have cost it about US$139 million in lost revenue. Since then the Metro Manila lockdown – including Entertainment City, of which Okada Manila is part – has been extended until at least May 15.
Universal Entertainment is also a supplier of pachinko and pachislot machines to the Japanese pachinko sector. It has been affected by Japan government restrictions on amusement hall facilities during the pandemic, although pachinko parlours in some locations had reportedly stayed open in defiance of the authorities’ wishes, according Japanese media reports.
Fitch noted regarding the shutdown of Okada Manila and Universal Entertainment’s exposure to the Japanese pachinko market: “We expect the extended closure of the integrated resort due to the pandemic to compound earnings volatility in the domestic amusement-equipment business, which had only begun to recover from a prolonged slump prior to the outbreak, and result in a credit profile that is no longer commensurate with a ‘B+’ rating.”
Fitch added: ‘The negative outlook reflects the lack of visibility over the timing and extent of a potential recovery.”
Given what the ratings agency termed the “severity” of the coronavirus outbreak, it said Fitch believed Okada Manila was “likely to remain closed through May and only resume operations in mid-June”.
It added: “Under this scenario, we assume a 70 percent year-on-year drop in revenue in second-quarter 2020, followed by a 25 percent decline in third-quarter 2020 and a 15 percent decline in fourth-quarter 2020, in line with our assumptions for comparable global casino markets.”
The ratings house noted that Universal Entertainment had “improved its capital structure” compared to previous years, by cutting interest-bearing debt from JPY252 billion (US$2.35 billion) at end of 2017 to JPY84 billion by the end of 2019 and “reducing its reliance on short-term financing”.
The institution stated that Universal Entertainment’s short-term debt of JPY8 billion at year-end 2019 was “comfortably covered” by a cash balance of JPY38 billion.
“The integrated resort closure will likely result in significant cash burn in second quarter 2020, but we believe the company has flexibility to preserve cash through measures such as furloughs and capex [capital expenditure] cuts,” added Fitch.
The ratings agency observed: “Refinancing risk is manageable as its US$600-million notes only mature in December 2021. However, we believe a prolonged integrated resort closure and weaker-than expected recovery could lead to declining liquidity as well as negatively affect Universal Entertainment’s access to funding. We will therefore continue to evaluate the impact of the pandemic on Universal Entertainment’s liquidity, cash-flow generation and refinancing options closely.”
A May 6 note from brokerage Union Gaming Securities LLC suggested Okada Manila might be of interest to United States-based Las Vegas Sands Corp if the latter starts shopping for takeover targets in Asia, as mentioned recently by its chairman and chief executive Sheldon Adelson.
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