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Rating Action: Moody's assigns Ba2 rating to Melco Resorts Finance's proposed notes; outlook negative
Global Credit Research - 13 Jan 2021
Hong Kong, January 13, 2021 -- Moody's Investors Service has assigned a Ba2 rating to the proposed add-on to Melco Resorts Finance Limited's (MRF, Ba2 negative) senior unsecured notes due 2029.
The rating outlook on MRF is negative.
MRF will use the proceeds from the add-on issuance, and cash on hand if applicable, to repay existing debt at its subsidiary, MCO Nominee One Limited, together with accrued interest and associated costs. Any remaining amount will be used for general corporate purposes.
"The Ba2 ratings reflect the group's established operations and high-quality assets under its parent, Melco Resorts & Entertainment Limited (MRE), which counterbalance its geographic concentration in Macao SAR's gaming market," says Sean Hwang, a Moody's Assistant Vice President and Analyst.
MRF's credit quality and ratings are driven by the consolidated credit quality of MRE, because MRE wholly owns MRF and relies heavily on MRF for profit generation and funding.
MRE's operations continue to be weak amid lingering pandemic-related disruptions. The company reported negative EBITDA of $221 million for the first nine months of 2020, compared with $1.2 billion positive EBITDA a year earlier.
Moody's expects gaming revenue in Macao SAR will improve in 2021 from the very weak level in 2020, underpinned by a rebound in Chinese tourists visiting the territory following the relaxation of some travel restrictions. However, the recovery will be gradual and partial, at least for most of 2021, given the remaining restrictions and social distancing measures and a lingering fear of infection.
As a result, Moody's expects MRE's earnings in 2021 will remain sluggish, before recovering close to pre-pandemic levels in 2022-23.
At the same time, Moody's expects MRE's consolidated debt level (including lease liabilities and Moody's adjustments) will increase to around $7 billion over the next 12-18 months from $6.1 billion as of 30 September 2020, as the company's sluggish cash flow and planned capital spending, including the phase two construction of the Studio City property and the development of its Cyprus integrated resort, will likely lead to negative free cash flow during this period.
Given the above expectations, Moody's projects MRE's adjusted debt/EBITDA will be elevated at around 10x or higher in 2021 before improving to around 5x-6x in 2022 and around 4x in 2023.
While MRE's projected leverage for 2023 would be appropriate for its Ba2 ratings, there is significant risk to this projection, given the lingering uncertainties over the pace and extent of the company's earnings recovery. A prolonged weakness in operations can lead to larger negative free cash flow and higher debt leverage than Moody's currently anticipates. The negative rating outlook reflects this risk.
MRE's liquidity sources, including its consolidated cash of $1.9 billion at the end of September 2020 and its revolving credit facility, whose availability will increase to $1.9 billion after the proposed refinancing, provide adequate cushions against the expected negative free cash flow over the next 12 months.
The Ba2 rating for the proposed senior unsecured notes is in line with the company's corporate family rating because Moody's expects the company to keep its secured debt at a low level.
In terms of environmental, social and governance (ESG) considerations, Moody's regards the coronavirus outbreak as a social risk, given the substantial implications for public health and safety. The gaming sector is among the sectors most significantly affected by the shock, given its sensitivity to travel restrictions and consumer sentiment.
Moody's also considers the risks associated with MRE's increasing appetite for growth, as illustrated by its continued pursuit of partly debt-funded expansion projects, as well as its high ownership concentration. However, MRE's track record of maintaining healthy financial leverage and good liquidity, and the oversight exercised by its independent board directors mitigate these risks.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING
Moody's could return MRF's outlook to stable if the Melco group under MRE improves its earnings, contains its debt growth and continues to maintain its sizeable cash. This can be evidenced by MRE's adjusted debt/EBITDA falling below 4.5x-5.0x on a sustained basis.
Moody's could downgrade MRF's ratings if it believes that MRE's adjusted debt/EBITDA would not return to below 4.5x-5.0x on a sustained basis, due to a sustained weakness in earnings or a significant increase in debt, or if MRE's liquidity weakens significantly. This situation could arise from a protracted and severe impact of the coronavirus outbreak or the company's continuation of its aggressive financial policy during the earnings downturn.
In addition, the ratings on MRF's senior unsecured notes could come under pressure in the event of a sustained increase in MRF's subsidiary-level priority claims relative to its consolidated claims.
The principal methodology used in this rating 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.
Melco Resorts Finance Limited (MRF) is a wholly-owned subsidiary of Melco Resorts & Entertainment Limited (MRE), which is listed on the NASDAQ exchange and is majority-owned by the Hong Kong-listed Melco International Development Ltd. All of MRF's operations are currently located in Macao SAR.
Through Melco Resorts (Macau) Limited, MRF operates two wholly-owned casinos in the territory, Altira Macau and City of Dreams. It also has non-casino-based operations at its Mocha Clubs and operates the gaming business at the Studio City casino.
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.
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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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