Moody’s downgrades Melco Resorts Finance on recovery lag

Nov 10, 2021 Newsdesk Latest News, Macau, Philippines, Top of the deck, World  

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Moody’s Investors Service Inc has downgraded Melco Resorts Finance Ltd’s corporate family rating and senior unsecured ratings to ‘Ba3’, from ‘Ba2’. The outlook on the company remains ‘negative’, the institution said in a Monday announcement.

Melco Resorts Finance is a unit of casino operator Melco Resorts and Entertainment Ltd, which has business in Macau, the Philippines, and the Republic of Cyprus.

“The rating downgrade reflects our expectation that Melco group’s debt levels and leverage metrics over the next few years will be substantially higher than pre-pandemic levels, because of the slow recovery in earnings amid lingering travel restrictions and sizeable capital spending,” said Sean Hwang, a Moody’s assistant vice president and analyst, as cited in the document.

Moody’s forecasts that Melco Resorts’ adjusted debt – including lease liabilities – will increase to around US$7.6 billion over the next 12 to 18 months, from US$6.1 billion as of the end of 2020, and US$4.9 billion as of the end of 2019.

Consequently, Moody’s expects Melco Resorts’ adjusted debt/earnings before interest, taxation, depreciation and amortisation, to be around 5.0 times to 5.5 times in 2023, which the institution said would be “meaningfully higher” than the 3.3 times recorded in 2019.

Though Mr Hwang stated that Moody’s view was “despite our assumption that Melco group’s earnings will recover substantially by 2023″.

Obligations rated ‘Ba’ by Moody’s are judged to have “speculative elements” and are subject to “substantial credit risk”, according to the ratings house. The ‘3’ indicates a ranking at the lower end of that generic rating category.

Moody’s stated that Melco Resorts Finance’s ratings reflected the consolidated credit quality of its parent, because the finance unit was “100 percent-owned” by Melco Resorts, and the latter “relies heavily on Melco Resorts Finance and its subsidiaries for profit generation and funding”.

The ratings agency said it expected “weak earnings and operating cash flow during 2021-22” would lead Melco Resorts to “fund most of its capital spending with additional debt until 2022, mainly related to its Cyprus integrated resort project and the Studio City phase-two expansion.”

Those were references to City of Dreams Mediterranean in Cyprus, and the majority Melco Resorts-owned Studio City resort in Cotai, Macau.

Phase two of Studio City should be ready “no later than December 2022,” said in July company chairman and chief executive Lawrence Ho Yau Lung. The expansion will increase the property’s hotel room inventory, with two new luxury hotel towers offering approximately 900 rooms and suites. There will be additional gaming space, and non-gaming facilities including a multiscreen cinema, restaurants, space for conferences and meetings, and an indoor-outdoor water park. The first phase of the water park was launched in May.

Moody’s stated it had lowered its forecasts on Macau mass-market gross gaming revenue (GGR) in 2022, to around 60 percent of the 2019 level, and expected a “near-full recovery only in 2023”.

The institution also forecast the city’s VIP gaming revenue in 2023 would “remain substantially below the 2019 levels, given the increasing regulatory scrutiny over the segment and the weakened junket sector”.

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