Crown Resorts faces the prospect of ratings downgrades from Moody’s and Fitch in the wake of last week’s outlining of plans to demerge its international casino holdings and separate its Australian property holdings from its local casinos.
Both Moody’s and Fitch late last week put the ratings of Crown Resorts Limited on review for downgrade.
While both stressed that their final decisions depended on the details of both proposals, the two made it clear that any “positive” rating actions were unlikely.
Fitch summed it up best: "The proposed demerger could result in a one-notch downgrade following a review of information on Crown’s capital structure. Any further downgrade pressure will depend on whether Crown adopts an aggressive capital structure, or leverage or capital management policies not consistent with its rating. Positive rating action is unlikely due to the uncertainty about the demerger."
And Moody’s attitude was best summed up by this statement late last week: "The proposed demerger of international assets, and increased dividend payout will result in a decline in Crown’s retained cash flow, and materially reduce its asset base," says Matthew Moore, a Moody’s Vice President and Senior Credit Officer.
"The reduction in retained cash flow arising from Crown’s increased dividend payout and the cessation of dividends from Melco Crown Entertainment Limited (MCE, unrated) will mean that Crown will have less capacity to contribute to the capital cost of the AUD2 billion, Crown Sydney project, from internally generated funds," adds Moore.
"Moody’s also points out that the demerger will result in Crown’s asset base falling materially, because it will lose its around 27.4% interest in MCE, valued at approximately AUD2.7 billion. “Moody’s further points out that while the outlook for dividends from MCE is subdued—in view of the downturn for the gaming industry in Macau—Crown’s stake in MCE provides an alternate source of liquidity, as demonstrated by Crown’s sale in May 2016 of part of its shareholding in MCE.
"The sale reduced its ownership to 27.4% from 34.3% and raised approximately US$800 million in cash, which reduces debt in the short term. The MCE shareholding will no longer be available as a source of alternate liquidity following the demerger,” Moody’s said in its statement.
And Fitch expressed similar reservations (but also pointed to a strength): "The proposed capital structure for Crown and InternationalCo will be a key determinant in the resolution of the RWN. While the details are still to be disclosed, Fitch believes this and the increase in the DPR will lead to a weakening in Crown’s credit metrics.
"Further, Crown will no longer have the ability to monetise its 27.4% interest in MCE as an alternate liquidity source. Crown was able to use its interest in MCE to this effect in May 2016 when it raised USD800m from the sale of 155 million shares via private placement.
"High Geographical Concentration: The proposed demerger will concentrate Crown’s activities in Australia and reduce its scale, thus negatively impacting any benefit previously given to its rating from its geographical diversification. However, this concentration is partly mitigated by the strength of Crown’s Australian casinos,” Fitch pointed out.
Crown shares edged up 0.7% by the close to $12.99, after touching a day high of $13.12 yesterday.
