Two separate rating agencies say they have a negative outlook on the credit profile of Macau casino operator SJM Holdings Ltd, as the company proposes to conduct an international offering of U.S.-dollar denominated senior notes.
Fitch Ratings Inc has assigned a long-term foreign-currency issuer default rating of “BB+” with a negative outlook, and a senior unsecured rating of “BB+”. Fitch has also assigned the company’s proposed U.S. dollar senior notes a “BB+” rating, according to a Sunday report.
Separately, Moody’s Investors Service Inc has assigned a first-time “Ba1” corporate family rating to SJM Holdings, and a “Ba2” backed senior unsecured rating to the proposed U.S.-dollar notes.
The notes are issued by Champion Path Holdings Ltd and guaranteed by SJM Holdings, for the latter’s Grand Lisboa Palace scheme (pictured), on Cotai.
Moody’s assigned a “negative” outlook for the notes, citing the likelihood of the casino group having this year “sluggish” adjusted earnings before interest, taxation, depreciation and amortisation (EBITDA), at circa HKD1.50 billion (US$193.5 million), amid the pandemic.
In its note, Fitch said its ratings of SJM Holdings reflected the company’s “record of maintaining a conservative financial position, with well-established operations in Macau,” as well as “minimal capital-expenditure pipeline following the completion of the HKD39 billion Grand Lisboa Palace.”
Fitch said however that SJM Holding’s credit profile was constrained by “a weaker-than-peer market position due to its lower exposure to Cotai.” The Negative Outlook reflected the “risk of a recovery that is slower than our expectations, which may result from extended travel restrictions and a slower ramp-up of Grand Lisboa Palace,” added the ratings agency.
Moody’s also mentioned “ramp-up risk” associated with the Grand Lisboa Palace project, SJM Holdings’ first foray into the Cotai casino resort market.
Grand Lisboa Palace launch timing
In its third-quarter earnings summary, issued in October, the casino group mentioned the possibility of Grand Lisboa Palace opening “during the first quarter of 2021”.
Brokerage Union Gaming Securities LLC said in a November note, it might be the year 2022 before operations at the property were fully up to speed, amid the Macau market’s recovery from the Covid-19 pandemic.
Fitch said in its memo that Grand Lisboa Palace would allow SJM Holdings to “raise its market share” in Macau.
The institution added: “We forecast Grand Lisboa Palace will have EBITDA of HKD2.0 billion with 330 tables by 2022, and HKD3.5 billion with 380 tables by 2023, which will be partially offset by slightly lower EBITDA at its existing properties due to table reallocation and business diverted to Grand Lisboa Palace,” added the institution.
The Hong Kong-listed casino group said in a Monday filing that should the notes be issued, “approximately 90 percent of the net proceeds” would be used for refinancing syndicated credit facilities for Grand Lisboa Palace, with the balance for general corporate purposes.
The regulatory announcement outlined the syndicated facilities included a HKD12.44-billion term loan; a HKD8.29 billion revolving credit facility; and a MOP1.38 -billion (US$173.1-million) term loan.
Moody’s stated in its Monday commentary: “As of 30 September 2020, SJM’s cash of HKD5.9 billion and unused credit facilities of HKD8.5 billion were insufficient to cover the HKD15 billion term loan maturities through February 2022 and the remaining capital spending for the Grand Lisboa Palace project.”
Moody’s also noted: “While the remaining construction payments for Grand Lisboa Palace and sluggish [Macau] operations will increase SJM’s adjusted debt to around HKD23 billion by the end of 2021 from HKD16 billion at the end of 2019, Moody’s expects SJM to gradually reduce debt from 2022 based on earnings growth and a significant reduction in capital spending”.
As a result, Moody’s projects the casino group’s adjusted debt/EBITDA will “improve to about 3.7 times in 2022 and 2.4 times in 2023 from over 10 times in 2021”. It added: “This projected level of leverage for 2023 will be appropriate for its Ba1 rating”.
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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