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Rating Action: Moody's assigns B1 to Studio City Finance's proposed senior unsecured notes
Global Credit Research - 04 Jan 2021
Hong Kong, January 04, 2021 -- Moody's Investors Service has assigned a B1 senior unsecured rating to the proposed US dollar notes to be issued by Studio City Finance Limited (B1 negative).
The outlook on Studio City Finance is negative.
Studio City Finance plans to use the proceeds from the new notes, together with cash on hand if applicable, to repay its $600 million senior unsecured notes due 2024 and related costs, and use any remaining amount to partially fund the Studio City phase two project and for general corporate purposes.
"Studio City Finance's B1 ratings reflect the improved competitive standing of its Studio City property following the successful ramp-up of casino operations since its opening in 2015, counterbalanced by the risk associated with the company's geographic concentration in Macao SAR," says Sean Hwang, an Assistant Vice President and Analyst.
Studio City Finance's B1 ratings also reflect Moody's expectation of extraordinary support from Melco Resorts & Entertainment Limited in times of need, given Studio City Finance's strategic importance to its parent. This expectation leads to a one-notch uplift from Studio City Finance's standalone credit quality.
Studio City Finance's operations continue to be weak amid the lingering pandemic-related disruptions. Studio City International Holdings Limited, the listed intermediate holding company of Studio City Finance, reported negative EBITDA of $99 million for the first nine months of 2020, compared with $258 million positive EBITDA a year earlier.
Moody's expects Studio City Finance's revenue and earnings to rebound over the next 12-18 months from the very weak level in 2020 amid a rebound in Chinese tourists visiting Macao SAR following the relaxation of certain travel restrictions in August and September 2020.
That said, the recovery will be gradual and partial, at least for most of 2021, given the remaining restrictions and social distancing measures, the lingering fear of infection among gaming patrons, and the risk of a resurgence in infections before mass vaccination is achieved.
As a result, Moody's expects Studio City Finance's earnings in 2021 to remain meaningfully below pre-pandemic levels, before recovering further in 2022.
Given the above expectation, and Moody's assumption that Studio City Finance will fund part of its $1.25 billion-$1.3 billion phase two capital spending with new debt, Moody's expects the company's gross debt/EBITDA to be 10x-13x in 2021 before recovering to around 6.5x-7.0x in 2022. The negative rating outlook mainly reflects the uncertainty over the pace of recovery in earnings and leverage metrics.
Studio City Finance's liquidity is adequate for the next 12 months. Its cash holdings of $156 million as of 30 September 2020 and $499 million in new equity proceeds received in the fourth quarter of 2020 will be sufficient to cover the company's cash burn and planned capital spending over the next 12 months.
The company's senior unsecured bond ratings are not affected by subordination to claims at the operating company level, because the latter is not seen as material. Moody's expects the majority of claims will remain at the holding company and on an unsecured basis.
Moody's regards the coronavirus outbreak as a social risk under its environmental, social and governance (ESG) framework, given the impact of the related disruptions on the company's operations and substantial implications for public health and safety.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING
Given the negative outlook, a ratings upgrade is unlikely. But Studio City Finance's outlook could return to stable if the company improves its earnings and maintains a balanced financial policy, such that debt/EBITDA falls below 7.5x-8.0x and EBITDA/interest exceeds 1.8x on a sustained basis.
On the other hand, Moody's could downgrade Studio City Finance's ratings if (1) its operations are unlikely to recover sufficiently or (2) it engages in aggressive debt-funded capital spending, resulting in tight liquidity and high leverage on a sustained basis.
Specifically, credit metrics indicative of a downgrade include debt/EBITDA above 7.5x-8.0x and EBITDA/interest below 1.8x on a sustained basis.
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.
Studio City Finance Limited is a holding company incorporated in the British Virgin Islands. Through its subsidiaries, it develops and operates the Studio City property, an Asian-focused integrated gaming and entertainment resort located in Cotai, Macao SAR.
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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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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