Rating Action: Moody's assigns Ba2 to Melco Resorts Finance's proposed notes; outlook negative
Global Credit Research - 14 Jul 2020
Hong Kong, July 14, 2020 -- Moody's Investors Service has assigned a Ba2 rating to the proposed senior unsecured USD notes to be issued by Melco Resorts Finance Limited (MRF, Ba2 negative).
The rating outlook is negative.
MRF will use the notes proceeds for repayment of existing debt at its subsidiary MCO Nominee One Limited, as well as for general corporate purposes.
RATINGS RATIONALE
"The Ba2 rating reflects the established operations and high-quality assets of the group under the parent Melco Resorts & Entertainment Limited (MRE), which counterbalance the group's geographic concentration in Macao SAR's gaming market," says Sean Hwang, a Moody's Analyst.
MRF's credit quality and ratings are driven by the consolidated credit quality of its parent MRE, because MRF is 100%-owned by MRE, and MRE relies heavily on MRF for profit generation and funding.
In addition, the proposed note issuance, together with Studio City Finance Limited's recent notes issuance and Studio City International Holdings Limited's equity offering, will further strengthen MRE's liquidity.
MRE's liquidity sources, including its consolidated unrestricted cash of USD1.2 billion at the end of March 2020, a new USD1.9 billion five-year revolving credit facility and proceeds of about USD355 million from the disposal of its stake in Crown Resorts Limited (Baa2 negative), provide adequate cushions against potential cash burn at least for the next 12 months.
"However, the rating outlook remains negative, reflecting the steep drop in the group's earnings in 2020 amid coronavirus-induced disruptions, and the high uncertainties over the timing and extent of future earnings recovery," adds Hwang.
MRE's consolidated revenue declined 41% to USD811 million in the first quarter of 2020 from USD1,383 million a year earlier, mainly as a result of the stringent travel restrictions and facility closures in its key markets, namely Macao SAR (Aa3 stable) and the Philippines (Baa2 stable). This revenue decline led to its reported EBITDA falling to USD55 million from USD388 million over the same period. Moody's expects negative EBITDA for the company for the second quarter of 2020.
Weakened earnings, coupled with the group's planned capital spending, will result in significant negative free cash flow and an increase in net debt until sufficient recovery takes hold.
While Moody's expects MRE's earnings and cash flow to improve gradually from the second half of 2020 once disruptions ease, the company's financial metrics in 2021 will likely fall short of 2019 levels. Also, there is significant downside risk to this recovery assumption.
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, the ratings factor in the high social risk stemming from the fact that Macao SAR remains susceptible to potential economic and policy outcomes in China, which could negatively affect MRE's gaming and tourism business.
Moody's regards the impact of coronavirus outbreak on its operations as a social risk under its ESG framework, given the substantial implications for public health and safety.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING
MRF's outlook can return 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.
MRF's ratings could be downgraded if Moody's believes that MRE's adjusted debt/EBITDA is unlikely to 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 can result from a protracted and severe impact of the coronavirus outbreak or the company's continuation of an 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 Industry published in December 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1099757. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
Melco Resorts Finance Limited is a wholly-owned subsidiary of Melco Resorts & Entertainment Limited, which is listed on the NASDAQ exchange and is majority-owned by the Hong Kong-listed Melco International Development Ltd. All of Melco Resorts Finance's operations are currently located in Macao SAR.
Through Melco Resorts (Macau) Limited, Melco Resorts Finance operates two wholly-owned casinos in the territory, namely, Altira Macau and City of Dreams. It also has non-casino based operations at its Mocha Clubs, and operates the gaming business at the casino of Studio City.
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.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The rating has been disclosed to the rated entity or its designated agent (s) and issued with no amendment resulting from that disclosure.
This rating is solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. Unless noted in the Regulatory Disclosures as a Non-Participating Entity, the rated entity is participating and the rated entity or its agent(s) generally provides Moody's with information for the purposes of its ratings process. Please refer to www.moodys.com for the Regulatory Disclosures for each credit rating action under the ratings tab on the issuer/entity page and for details of Moody's Policy for Designating Non-Participating Rated Entities.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.
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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