“Weak operating cash flow” for Macau casino resort Studio City amid the ongoing Covid-19 travel restrictions, and capital spending for Phase 2 of the venue, will lead to “significant debt growth through 2022” for Studio City Finance Ltd, says a Tuesday note from Moody’s Investors Service Inc.
Another ratings house, Standard & Poor’s Global Ratings, had noted in a Monday memo that fresh financing linked to the Studio City complex, should enable its owner, Studio City International Holdings Ltd, to “withstand a zero-revenue scenario for at least a year”.
Vitaly Umansky, a Hong Kong-based analyst at brokerage Sanford C. Bernstein Ltd, said in a Tuesday note, that at current business volumes, Studio City “remains cash flow negative, when factoring in maintenance capital expenditure – which is minimal – and interest costs”.
But he observed that following fresh funding, Studio City would have “annual interest costs of approximately US$160million”. Mr Umansky added: “The overall liquidity situation is manageable at the property.”
Moody’s has issued a ‘Ba3’ rating with ‘negative’ outlook to some U.S. dollar senior secured bonds to be issued by Studio City Co Ltd, as part of the overall financing move. The latter entity is wholly owned by Studio City Finance. The pricing of the bonds is still to be announced.
The Ba3 rating is considered by Moody’s as below investment grade, with “speculative elements” that are “subject to substantial credit risk”.
The proceeds from the proposed bond issuance, together with new equity issuance, will be used to fund the Studio City Phase 2 project and for general corporate purposes.
Studio City International said in a Monday filing in the United States that the budget for Phase 2 of the casino resort had been cut to approximately US$1.2 billion.
The proposed bonds and equity issuance would “significantly strengthen Studio City’s liquidity profile and help it contain a deterioration in its capital structure” caused by the anticipated weak cash flow and capital spending for Phase 2, said Gloria Tsuen, a Moody’s vice president and senior credit officer.
But she stated there were “lingering uncertainties around the recovery of the gaming market and the extension of existing gaming licences,” in Macau. “These factors drive the negative outlook,” Ms Tsuen added.
Melco Resorts and Entertainment Ltd, a majority investor in Studio City via the Studio City International entity, and which runs the casino there, will – along with the other five operators in the local market – see the expiry of the current gaming permits on June 26 this year.
S&P Global assigned ‘B+’ issue rating to Studio City’s proposed notes. That is also considered by the ratings body as non-investment grade, but one of the highest-quality of the ‘speculative’ band of ratings.
