Moody's raises outlook on Melco Resorts' credit rating
Moody's Investors Service raised the outlook on Melco Crown Entertainment Group's (NASDAQ: MLCO ) credit rating to stable from negative.
This comes after the City of Dreams operator reported strong third-quarter results last week. The improving outlook has been driven by rising gross gaming revenue (GGR) in the Macau Special Administrative Region (SAR), one of Melco Crown's key markets.
The change in outlook from Negative to Stable reflects our expectation that Melco's financial leverage will improve significantly over the next 12 to 18 months as the Macau SAR gaming market recovers strongly. " said Moody's analyst Gloria Tsuen.
Moody's gave Lawrence Ho's gaming company a junk rating of Ba3. The operator lost $100 million last year. Still, Moody's estimates Melco will improve significantly this year, with the ratings agency forecasting earnings before interest, tax, depreciation, and amortization (EBITDA) of $900 million before rising to $1.4 billion in 2024. The dollar rose. That's an increase from forecasts for $700 million and $1.2 billion in bond issuances earlier this year.
Melco Liquidity Helps
As of the end of the third quarter, Melco International had $1.2 billion in cash (excluding restricted cash). That implies some value, as the operator has a market capitalization of $3.1 billion, perhaps a sign that the investment community isn't giving the gaming company's cash holdings the credit they deserve.
Furthermore, this stable balance suggests that Melco will be able to service its debt for the foreseeable future - which is relevant considering that Macau franchisee debt has soared due to the coronavirus pandemic. Melco International has no debt maturities until 2025.
"These resources and improvements in operating cash flow will be sufficient to cover the company's capital expenditures and short-term debt repayments over the next 12 to 18 months," Tsuen added.
The ratings agency said Melco's high-quality assets and strong long-term growth in Macau were factors supporting the operator's credibility.
How to upgrade Melco
Melco's current credit rating is 'Ba3', which is three notches below the investment grade range, so it may take some time to reach that range. But it's possible to upgrade to higher-end crap. This will require further earnings growth and a reduction in debt-to-EBITDA ratio to 4.5x to 5x. This rate is approximately 3.3 times that before the outbreak. If these factors move in the wrong direction, it could also indicate the potential for a rating downgrade.
Conversely, Moody's could downgrade MRF if MRE's adjusted debt/EBITDA rises above 5.5x to 6.0x on a sustained basis or if liquidity weakens. "This scenario could be due to a weaker-than-expected earnings recovery, a failure to reduce debt, or the company's aggressive financial policies," the ratings agency said.
In Macau, Melco International operates City of Dreams, Morpheus, Studio City and Altira.
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Source: www.casino.org
