Fitch Ratings - Singapore - 16 Oct 2020: Fitch Ratings has downgraded the Long-Term Issuer Default Ratings of Genting Berhad (Genting) and its wholly owned subsidiaries, Genting Overseas Holdings Limited (GOHL) and Resorts World Las Vegas LLC (RWLV), to 'BBB' from 'BBB+'. The Outlook is Stable.
The downgrade reflects Fitch's expectation that recovery from the coronavirus pandemic will be slower than initially forecast, in particular for Singapore, which relies on international tourism, as borders are likely to remain shut for the rest of 2020 and continued social distancing measures constrain visitor volumes. The slow recovery and high capex commitments will keep Genting's consolidated net leverage above 2x until end-2024, which is no longer consistent with a 'BBB+' rating.
Genting's rating reflects its position as the sole casino-licence holder in Malaysia and robust share in Singapore duopolistic market. Genting's other businesses add diversification both in terms of geography and sectors, and the group has a history of maintaining a prudent balance sheet.
The Stable Outlook reflects Fitch's expectation that the company will reduce leverage closer to 3x by end-2023, supported by a gradual recovery, operating ramp-up at RWLV, and the company's commitment to a strong capital structure.
KEY RATING DRIVERS
Lasting Impact from Pandemic: Fitch does not expect Genting's consolidated revenue and EBITDA to return to pre-pandemic levels until at least end-2022. We previously forecast a recovery in 2021. Fitch estimates Genting's consolidated EBITDA will fall by 80% to MYR1.5 billion in 2020, before gradually improving to MYR4.2 billion in 2021 and MYR7.4 billion in 2022. The pandemic has weakened the company's cashflows, and its high capex commitments in the next two to three years will delay deleveraging.
Recovery to Take Longer Than Expected: Genting has reopened most of its properties since June, but recurring waves of infection and measures to control the coronavirus will limit recovery prospects in the short to medium term. Fitch expects recovery in the gaming sector to be slow, particularly for companies in destination markets such as Las Vegas, Macau and Singapore. This is because revenues in these markets are driven mostly by inbound travellers.
Revised Estimates: Fitch now forecasts Genting Singapore's EBITDA to return to its pre-pandemic level in 2023, compared with our previous forecast of 2022. We also expect RWLV to fully ramp-up only in 2024, versus our previous forecast of 2023. While Fitch expects the recovery to be faster in Malaysia, where revenues are driven by domestic demand, that will not fully offset the slow recovery in other markets.
Switch to Proportionate Consolidation: Fitch has changed the approach for assessing Genting's financial profile to proportionate consolidation of some key subsidiaries, from consolidation but with adjustments for minority interests. Genting's net leverage is now measured as adjusted net debt/ EBITDAR based on proportionate consolidation of Genting Singapore (GENS), Genting Malaysia (GENM), and Genting Plantations (GENP), and proportionate consolidation of the 24% effective share of Empire Resorts, which is held through GENM.
Fitch's criteria allow for proportionate consolidation in cases where minority interest in subsidiaries is one-third or more. We think this approach better reflects that dividends will be the main way to upstream cash from the subsidiaries and any equity raising to support operations is likely to include minorities, as GENS, GENM and GENP are listed in well-regulated markets and have significant and active minority shareholders. Thus, Genting's access to the subsidiaries' cash and liabilities is limited to its stake.
Switch Raises Net Leverage: Proportionate consolidation results in a net leverage profile that is 0.3x-0.5x higher than using consolidation with minority adjustments, as these key subsidiaries have lower leverage and retain higher cash than Genting.
RWLV Opening On Track: Construction is progressing and RWLV is still scheduled to open in summer 2021. In response to the pandemic, the company has also adjusted the casino layout to allow for social distancing. These initiatives should support visitor volume once the project opens, but new waves of infections remain a key risk to our ramp-up expectations.
High Capex Commitments: Capex will be high in the next three years to complete RWLV and as Genting Singapore embarks on its SGD4.5 billion redevelopment of Resorts World Sentosa. At the same time, Genting Malaysia is also completing its 10-year redevelopment plan for Resorts World Genting and plans to open a new hotel at Resorts World Casino New York City in 2022. These commitments will delay deleveraging. We have not factored in any capex for potential expansion to Japan, given the uncertainty around the project.
Subsidiaries' Ratings Equalised with Parent: The ratings of GOHL and RWLV are equalised with that of Genting due to Fitch's assessment of a strong overall linkage in line with its Parent and Subsidiary Linkage Rating Criteria. Under the assessment, Fitch views Genting as a stronger parent and GOHL and RWLV as weaker subsidiaries. There are strong strategic and operating ties between Genting and the subsidiaries. GOHL is the holding company for Genting's 52.7% stake at Genting Singapore, while RWLV, when opened, will be Genting's third-largest integrated resort after those in Malaysia and Singapore.
DERIVATION SUMMARY
We believe Genting and Crown Resorts Limited (BBB/Stable) have the same overall risk profile, and they are therefore rated at the same level. Genting has larger and more diversified operations than Crown, both in terms of geography and non-gaming contributions. However, this is offset by Crown's stronger financial profile, such that we expect Crown will be able to deleverage back to 1x by June 2022, supported by healthy domestic demand, and completion of major capex.
Genting is rated higher than Las Vegas Sands Corp (LVS, BBB-/Negative) due to Genting's more diversified gaming operation and record of maintaining a more conservative balance sheet than LVS. Genting's rating also benefits from some business diversification from its plantation and energy segments. Genting's more favorable business profile stems from the balanced contributions from its two key gaming markets of Singapore and Malaysia, where it enjoys licence exclusivity. This is in contrast to LVS's high reliance on Macau, where the market is more competitive, and the risks around its concession renewal, which is due in June 2022.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Our Rating Case for the Issuer
Consolidated revenue and EBITDA to decline by 60% and 80%, respectively, in 2020, before gradually improving in 2021 and 2022. Revenue to exceed 2019 level while EBITDA to return to pre-pandemic level in 2022, driven by additional non-gaming earnings in Malaysia as new attractions start operating and the ramp-up at RWLV.
Capex progressing as scheduled. Consolidated capex spent in 2020-2022 to total MYR22 billion
RWLV opens in mid-2021
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
- We do not expect any rating upgrade in medium term, given challenges posed by the coronavirus pandemic and risks around recovery
Factors that could, individually or collectively, lead to negative rating action/downgrade:
- Genting not on-track to deleverage (adjusted net debt/ EBITDAR on proportionate consolidation basis) to below 3x by end-2023
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
LIQUIDITY AND DEBT STRUCTURE
Ample Liquidity, Long-Dated Maturities: Fitch estimates Genting will have consolidated cash of MYR20 billion by end-2020, against MYR2.5 billion in short-term debt. Genting's comfortable liquidity cushion, coupled with cost rationalization, should help the company to preserve cash. Genting's ample liquidity and long-dated debt maturities will allow the company to execute its capex without reliance to external debt. Genting does not have significant debt maturities until 2027 when its USD1.5 billion note is due.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG CONSIDERATIONS
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
