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Champion Path Holdings Limited -- Moody's assigns first-time Ba1 CFR to SJM Holdings; Ba2 to proposed senior unsecured notes; outlook negative

·17 min read

Rating Action: Moody's assigns first-time Ba1 CFR to SJM Holdings; Ba2 to proposed senior unsecured notes; outlook negative

Global Credit Research - 18 Jan 2021

Hong Kong, January 18, 2021 -- Moody's Investors Service has assigned a first-time Ba1 corporate family rating (CFR) to SJM Holdings Limited, and a Ba2 backed senior unsecured rating to the proposed notes to be issued by Champion Path Holdings Limited and guaranteed by SJM Holdings Limited.

The rating outlooks are negative.

SJM plans to use 90% of the proceeds of the notes for refinancing of its existing term loans, and the remainder for general corporate purposes.

RATINGS RATIONALE

"SJM's Ba1 CFR is mainly underpinned by its established gaming operations in Macao SAR, the expected earnings contributions from its new integrated resort in Cotai, and its conservative financial track record," says Sean Hwang, a Moody's Assistant Vice President and Analyst.

These strengths are counterbalanced by SJM's currently sluggish operations amid the pandemic, the ramp-up risk associated with its soon-to-open Grand Lisboa Palace (GLP) project in Cotai, and the company's geographic concentration in Macao SAR.

SJM's gaming business in Macao SAR dates back over 50 years, and it operates the largest number of casinos and tables across the gaming hub. The company's long operating history and well-entrenched market presence, together with the good long-term growth prospects for Macao SAR's gaming market, mitigate its geographic concentration in the territory.

The planned opening of GLP in the second quarter of 2021 and its subsequent ramp-up will allow SJM to increase market share, significantly improve earnings, and reduce its financial leverage. In particular, GLP's large non-gaming offerings, including some 1,900 luxury hotel rooms, should increase SJM's appeal to the high-margin premium mass segment of gaming patrons. Moody's expects GLP's earnings to account for 40%-50% of SJM's total EBITDA by 2023.

Macao SAR's gross gaming revenue should rebound gradually from 2021 from the very weak level in 2020, following some relaxation of travel restrictions between the territory and mainland China. However, Moody's expects Macao SAR's gaming market will only recover to pre-pandemic levels in 2022-23, because of the remaining restrictions and precautionary measures as well as the lingering fear of infection.

Based on the above expectations, Moody's projects SJM's adjusted EBITDA to be sluggish at around HKD1.5 billion in 2021, before growing to around HKD5.5 billion in 2022 and further to HKD7.5 billion-HKD8.0 billion in 2023. SJM's adjusted EBITDA (incorporating Moody's adjustments) was HKD4.7 billion in 2019.

SJM has a conservative financial policy, as evidenced by its moderate shareholder distributions and the maintenance of a net cash position until 2018.

While the remaining construction payments for GLP and sluggish 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 SJM's adjusted debt/EBITDA will improve to about 3.7x in 2022 and 2.4x in 2023 from over 10x in 2021. This projected level of leverage for 2023 will be appropriate for its Ba1 rating.

That said, significant uncertainties exist over this projection, because of the still uncertain prospect for Macao SAR's gaming market and the inherent ramp-up risk for GLP. These uncertainties drive the negative outlook.

The ratings factor in the company's planned bond issuance and refinancing of the existing term loan, which will significantly strengthen its liquidity profile. 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 GLP project.

The Ba2 rating for the proposed notes is one notch lower than SJM's Ba1 CFR because of the risk of structural and legal subordination. This reflects Moody's expectation that secured bank loans and subsidiary-level liabilities will remain the preponderance of SJM's liability structure, even after the proposed refinancing, and have priority over the senior unsecured claims at the holding company in a default scenario.

The ratings also take into account the following environmental, social and governance (ESG) factors.

Moody's regards the coronavirus outbreak as a social risk, given the substantial implications for public health and safety. The gaming sector has been one of the sectors most significantly affected by the shock, given its sensitivity to travel restrictions and consumer sentiment.

In terms of governance, SJM is majority-owned and controlled by Sociedade de Turismo e Diversões de Macau (STDM). That said, STDM has a track record of conservatively managing SJM over the past decade.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

An upgrade is unlikely over the next 1-2 years, given the negative outlook. The outlook could change to stable if SJM improves its earnings, contains debt growth and maintains strong liquidity, with adjusted debt/EBITDA falling below 3.3x-3.5x on a sustained basis.

Moody's could downgrade SJM's ratings if the company fails to achieve the expected improvement in its financial profile, such that adjusted debt/EBITDA is likely to remain above 3.3x-3.5x by 2022-23. This can happen if protracted weakness in SJM's existing operations or a sluggish ramp-up of its new Cotai project lead to weaker cash flow and materially higher debt than Moody's currently anticipates.

SJM's rating can also be downgraded if its liquidity weakens, for example as a result of a significant delay in completing its planned bond issuance and term loan refinancing.

The principal methodology used in these ratings was Gaming Methodology published in October 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1244702. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

SJM Holdings Limited develops and operates casinos and integrated resort facilities in Macao SAR. The company is listed on the Hong Kong stock exchange, and is owned 54% by Sociedade de Turismo e Diversões de Macau (STDM).

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

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The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.

Sean Hwang Asst Vice President - Analyst Corporate Finance Group Moody's Investors Service Hong Kong Ltd. 24/F One Pacific Place 88 Queensway Hong Kong China (Hong Kong S.A.R.) JOURNALISTS: 852 3758 1350 Client Service: 852 3551 3077 Chris Park Associate Managing Director Corporate Finance Group JOURNALISTS: 852 3758 1350 Client Service: 852 3551 3077 Releasing Office: Moody's Investors Service Hong Kong Ltd. 24/F One Pacific Place 88 Queensway Hong Kong China (Hong Kong S.A.R.) JOURNALISTS: 852 3758 1350 Client Service: 852 3551 3077

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