Moody’s Investors Service Inc says it expects the ratio of adjusted debt to earnings before interest, taxation, depreciation and amortisation (EBITDA) of Macau casino operators Melco Resorts and Entertainment Ltd and SJM Holdings Ltd to remain above 10 times for this year, as “earnings remain weak” because of the Covid-19 pandemic. The situation however is likely to improve in 2023 and 2024, it added.
Melco Resorts’ leverage “will not fall as fast [as SJM Holdings'] because we expect it to take on more debt to fund its expansion projects over the next two years,” stated the ratings agency in a Tuesday memo. Such projects include spending US$1.25 billion to US$1.30 billion in phase 2 construction of the Studio City property (pictured) in Macau; and US$550 million to US$600 million in the development of the group’s Cyprus casino resort, Moody’s added.
Melco Resorts Finance Ltd, a unit of Melco Resorts, announced last week an offering of US$250 million in 5.375-percent senior notes, due 2029.
Melco Resorts’ leverage is expected to improve to 5.3 times in 2022 and 3.8 times in 2023, suggested Moody’s.
The institution also said that SJM Holdings’ leverage “will decline more quickly in 2022-23 because of earnings contributions from its new property opening this year.” That was a reference to the firm’s HKD39 billion (US$5.03 billion) Grand Lisboa Palace scheme, on Cotai.
In its third-quarter earnings summary, issued in October, SJM Holdings mentioned the possibility of the Cotai project opening “during the first quarter of 2021”.
SJM Holdings announced this week plans to conduct – via a subsidiary – an offering of U.S.-dollar denominated senior notes, with “approximately 90 percent of the net proceeds” to be used for refinancing syndicated credit facilities for Grand Lisboa Palace.
Moody’s said SJM Holdings’ leverage is expected to decline to about 3.7 times in 2022 and 2.4 times in 2023 “because of earnings contributions” from Grand Lisboa Palace. “It [the property] is scheduled to open in the second quarter of 2021 and ramp up over the next two to three years,” it added.
The ratings agency said additionally that the Melco group had “higher profitability and more diversification” than SJM Holdings.
“SJM’s adjusted EBITDA margin is modest and much lower than Melco’s, driven mainly by its lower operating efficiency and the low-margin satellite casino business,” said the institution. Melco Resorts, on the other hand, “has good operational efficiency with its large-scale, mass-market-focused integrated resorts and diversification into the Philippines,” it noted.
Moody’s added: “These differences partly offset the effects of the leverage difference on the two companies’ credit quality.”
Melco also has “stronger liquidity,” said Moody’s, adding that SJM Holdings’ liquidity “should improve”. According to the ratings agency, Melco Resorts “has sufficient cash” to cover its operational needs and capital spending, “and it has no significant debt maturities until 2025”.
SJM Holdings “has HKD15-billion of term loan maturities through February 2022 but should be able to refinance the loan based on its longstanding banking relationships,” Moody’s stated. “SJM’s liquidity will strengthen significantly after the refinancing.”
It added: “Their strong liquidity will allow both companies to fund their cash burn and capital spending for at least the next 12 months, even if their operations recover slowly from the significant disruptions the coronavirus pandemic caused in 2020.”
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"The initial expectation for the October Golden Week was that the Cotai casino resorts might see an average occupancy rate at 80 percent to 90 percent. But that rate now might stand at just 50 percent to 60 percent... following Macau’s news of the new Covid-19 infection cases”
Andy Wu Keng Kuong
President of the Macau Travel Industry Council