Standard & Poor’s Financial Services LLC said in a Thursday circular it had placed all of its credit ratings for two major Macau subsidiaries of casino operator Melco Resorts and Entertainment Ltd on what it termed “credit watch negative”.
The two Macau subsidiaries are Melco Resorts (Macau) Ltd and Studio City Co Ltd.
S&P Global said the reason for the notice was anticipated further downside on the Macau gaming market due to the novel coronavirus health alert that began in mainland China. The Melco Resorts group as a whole is also supported by income from casino operations in the Philippines and the Republic of Cyprus.
At midnight on Tuesday, Macau closed all its casinos – and its other major centres of entertainment – for at least 15 days in an effort to prevent infection spreading locally. There were 10 confirmed cases within Macau as of Thursday, with one patient – a tourist from Wuhan, in Hubei province, the centre of the outbreak - having recovered and gone home after a fortnight of treatment in hospital. The mainland authorities have stopped – until further notice – issuing fresh permits for Chinese independent travellers to visit Macau under the country’s Individual Visit Scheme.
“We aim to resolve the credit watch once more information emerges to assess the potential impact of the coronavirus on Macau’s visitation and gaming revenue in 2020 and 2021, and therefore on Melco Resorts and Entertainment’s debt leverage,” stated S&P Global.
Roth Capital Partners LLC said in a Thursday note it estimated Melco Resorts’ Macau operating costs were approximately US$3 million a day.
“While two-thirds of fixed costs are payroll related and are unlikely to be mitigated, certain other costs (marketing within Macau, etc.) may be able to be ramped down, to an extent,” stated analyst David Bain.
As of September 30, the Melco Resorts parent retained total cash and bank balances of US$1.74 billion, including US$66.2 million of restricted cash, which was primarily related to Studio City, the group said in its third-quarter earnings statement. Total debt – net of unamortised deferred financing costs – as of September 30 was US$4.74 billion. The group is expected to report its fourth-quarter earnings soon.
Crown stake purchase dropped
On Thursday Melco Resorts announced it was dropping a plan to acquire a further nearly 10-percent stake in Australian casino operator Crown Resorts Ltd, citing its wish to conserve capital for the firm’s “core assets”, amid the “impact of the coronavirus epidemic”.
Based on the strength of the parent’s balance sheet, “this was purely a proactive, strategically-judicious move, in our view,” noted Roth Capital’s Mr Bain.
S&P Global nonetheless said on Thursday it anticipated that Melco Resorts’ could see a deterioration of its ratio of debt to earnings before interest, taxation, depreciation and amortisation (EBITDA) if the impact of the coronavirus alert lasts into the second or third quarter of this year.
The current coronavirus situation “could lead to an over 50 percent drop in Macau gaming revenue in the first quarter of 2020… given that visitors from China account for over 70 percent of total visitors to Macau” in normal times, S&P Global stated.
The ratings agency believed Melco Resorts’ EBITDA and cash flow would “drop substantially” in the current quarter, and “possibly even after that”. The agency also highlighted the fixed operating expense in labour that Melco Resorts has to bear in Macau during the mandated casino shutdown.
All six Macau licensees are said to have made a commitment to the Macau government not to cut staff salaries or impose lay-offs during the current alert. The operators all face the likelihood of a public retender for Macau gaming rights after their current licences expire in 2022.
S&P Global noted on Thursday: “Melco Resorts may choose not to defer its capital investment on its Studio City phase two project or scale back its shareholder returns, unless the impact from the coronavirus prolongs.”
Were the group to press ahead with those capital commitments against a backdrop of reduced cash flow, the credit ratings institution said Melco Resorts’ debt leverage “could increase sharply and exceed 3.5x in 2020, from our estimate of 2.5x to 3.0x in 2019, if visitation remains depressed into the second quarter or third quarter of 2020.”
On Thursday, Melco Resorts said it intended to “carry out key investments currently earmarked for Macau, Manila, Cyprus, and Japan, including the construction of Studio City phase 2 [in Macau] and City of Dreams Mediterranean [in Cyprus].”
In January Melco Resorts said it was postponing plans to phase out VIP gambling at Studio City, a property in which it is only a majority partner.
Roth Capital’s Mr Bain said the Melco Resorts-managed gaming operation at City of Dreams Manila in the Philippines had “not seen a significant negative impact” from the regional coronavirus alert, and that Melco Resorts’ January earnings in Macau had been “fairly normal”. Macau’s public health alert ramped up only on January 22, after the confirmation of the city’s first imported case of coronavirus infection.
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Analyst at Roth Capital Partners