Moody’s Skeptical About Melco Resorts’ Recovery, Assigns Ba2 Rating to Melco Resorts Finances

Article by : Helen Jan 22, 2021

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Melco Resorts & Entertainment has found itself in a pickle after its fully-owned subsidiary, Melco Resorts Finances, announced it is offering 5.375% senior notes, which will be due 2029. The offer is equivalent to $250 million, which Melco Resorts Finance wants to use to repay the debts of its subsidiary, MCO Nominee One Limited, and, if there is “any remaining balance,” it will be used “for general corporate purposes.”

The company’s press release prompted Moody’s Investor Service, one of the leading bond credit rating businesses worldwide, to assign Melco Resorts Finances’ decision a Ba2 rating, adding that the “rating outlook on [Melco Resorts Finances] is negative.”

“The Ba2 ratings reflect the group’s established operations and high-quality assets under its parent, Melco Resorts & Entertainment Limited (MRE), which counterbalances its geographic concentration in Macau SAR’s gaming market,” says Sean Hwang, a Moody’s Assistant Vice President and Analyst.

However, Moody’s analysts consider the company’s operations to be “weak” in the light of “pandemic-related disruptions.” Besides that, Melco relies heavily on the Macanese market for revenue, and Moody believes the market’s recovery will be “gradual and partial,” although somewhat driven by the influx of mainland Chinese visitors to the enclave after travel restrictions were relaxed. So, returning to the pre-pandemic financial performance is not on the table for Melco in 2021, according to Moody’s – this is more likely to happen in 2022 or 2023.

Another reason behind Melco Resorts Finances’ rating and its outlook is the expected increase in its consolidated debt level. Moody’s projects it to rise to $7 billion over the next 12-18 months (it amounts to $6.1 billion as of 30 September 2020). The casino operator currently has two construction projects in progress: Studio City and a Cyprus integrated resort. Combine the expenses that come with the projects with the “sluggish” income flows amidst the pandemic, and it’s a good recipe for increasing the debt levels.

Moody’s estimated Melco Resorts & Entertainment’s adjusted debt-to-EBITDA ratio is expected to rise to around 10x or higher in 2021 before bouncing back to 5-6x in 2022 and 4x in 2023.

Melco Resorts & Entertainment is a casino resort operator with properties in Asia (Altira Macau, City of Dreams, Studio City and Mocha Clubs in Macau; City of Dreams Manila in the Philippines) and Europe (City of Dreams Mediterranean in Cyprus). Its financial performance suffered from a severe blow due to the pandemic, as it remained in the red in 3Q2020 (the latest stats available at the moment). Operating loss for that period of time amounted to $275 million – a slight improvement from $370.8 million in operating loss in 2Q2020. The first quarter wasn’t profitable for the casino resort operator either: Melco reported an operating loss of $149.9 million back then.

Despite the underwhelming results the company had to show for 3Q2020, Lawrence Ho, the company’s Chairman and Chief Executive Officer, commented toneassuring investors, “We continue to prudently manage our balance sheet. Aided by the issuance of a series of new senior notes and the Studio City private share placements (but excluding Melco’s subscription therein of approximately $280 million), as of September 30, 2020, we had cash on hand of approximately $1.9 billion and undrawn revolver capacities of approximately $1.7 billion.”