GGRAsia – Studio City likely to fail first leverage tests: Fitch

Studio City likely to fail first leverage tests: Fitch

Sep 22, 2016 Newsdesk Latest News, Macau, Top of the deck

The current operational performance of Macau casino resort Studio City (pictured) indicates it is “likely to fail” its first financial tests concerning its borrowings relative to its earnings, says an analysis from Fitch Ratings Inc.

It adds that the resort’s 60 percent owner – Asian casino developer Melco Crown Entertainment Ltd, led by entrepreneur Lawrence Ho Yau Lung – might at some stage seek to increase its equity holding in the project.

The suggestions are contained in a global report on the casino industry – “All In: Global Gaming Handbook” – dated September 2016 and produced by the credit ratings house.

“At current run rate, Studio City is on track to generate US$100 million of EBITDA [earnings before interest, taxation, depreciation and amortisation] and burn about US$85 million in cash per year; and is likely to fail its first leveraged based financial tests (5.25x secured and 9x total leverage for period ending March 31, 2017),” said Alex Bumazhny, Fitch’s senior director for gaming, lodging and leisure.

The mass-market-focused Studio City – with a portfolio of non-gaming facilities – opened in October 2015, at a cost of US$3.2 billion and without any VIP gambling rooms. It was given an allocation of 250 new-to-market tables under the Macau government’s table cap. The cap does not prevent an operator from moving tables out of its other venues in order to populate a new property.

Since Studio City’s launch, a number of investment analysts had commented that the property had been underperforming in the Macau market in casino gross gaming revenue (GGR) terms relative to its number of gaming tables in operation.

Credit-based VIP play has been in decline for several years in Macau following an extended period of explosive growth, but nonetheless currently still accounts for approximately 50 percent of Macau casino gross gaming revenue, according to the city’s Association of Gaming and Entertainment Promoters. VIP play accounted for 52.9 percent of Macau’s casino GGR in the first half of 2016, according to official data.

Senior management at Melco Crown said earlier this month the venue hopes to add some VIP gaming capacity soon.

Performance doubts

In a filing to the U.S. Securities and Exchange Commission on August 29, Melco Crown said there was “no assurance that Studio City’s financial and operational performance will improve sufficiently in the remaining months of the year to meet all of its relevant financial targets”.

Fitch’s Mr Bumazhny said, referring to the ability of Studio City’s promoters to inject fresh equity into the project: “Studio City has up to two equity cures but the cures are capped at 30 percent of EBITDA or cash flow needed [in order] to be in compliance with the respective covenant (about US$70 million for the first total leverage test), which may not be enough.”

Under the US$1.4-billion Studio City senior secured facility agreement – of which the borrower is Studio City Co Ltd – several minimum financial condition requirements have to be met. In order for Studio City Co to meet such requirements for the year ending March 31, 2017, “the ramp-up of Studio City operations must be significantly accelerated” by then, Melco Crown had said in its August 29 filing.

Melco Crown added that Studio City “sits within a separate, ring-fenced credit group and Studio City’s debt obligations are not guaranteed by its shareholders”.

Fitch said in its latest global industry report: “Fitch Ratings views the MPEL [Melco Crown] main credit group and Studio City credit profiles separately, given the lack of guarantees, separate brands, difficult operating conditions in Macau, and Studio City’s 40 percent ownership by minority interests.”

Mr Bumazhny added: “While there are many plausible scenarios, Fitch believes the more likely outcome is MPEL increasing its stake in Studio City. New Cotai [LLC], a 40 percent equity owner in Studio City with US$628 million of debt outstanding, is unlikely to contribute pro rata equity to bail out Studio City. In an event of a default at either New Cotai or Studio City, MPEL would be a logical, strategic bidder for the equity issued to the creditors in question. Studio City’s performance would likely be optimised if it were wholly owned by MPEL due to the greater flexibility in marketing and table allocation.”

Casino executive JD Clayton, who had been property president at Studio City since before its launch, left the project last week, industry sources told GGRAsia. David Sisk, a former chief operating officer for Macau casino operator Sands China Ltd, has been recruited by Melco Crown, said the same sources.