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21 Nov 2005
MOODY'S ASSIGNS FIRST-TIME (P)B1 RATING TO GALAXY CASINO'S PROPOSED BONDS; OUTLOOK STABLE
Sydney, November 21, 2005 -- Moody's Investors Service has assigned its (P)B1 senior unsecured rating
to Galaxy Entertainment Finance Company Limited's (BVI) proposed
US$500 million bond issuance, which is guaranteed by Galaxy
Casino S.A. (Galaxy). At the same time, Moody's
has assigned its (P)B1 corporate family rating to Galaxy. The ratings
outlook is stable. This is the first time that Moody's has assigned
ratings to Galaxy. Moody's expects to affirm the ratings and remove
them from provisional status upon completion of the proposed US$500
million bond issuance.
The securities will be sold in a privately negotiated transaction --
without registration under the Securities Act of 1933 (the Act) --
under circumstances reasonably designed to preclude a distribution thereof
in violation of the Act. The issuance will be designed to permit
resale under Rule 144A.
The (P)B1 rating reflects the following credit challenges: 1) Operations
in a fast evolving competitive environment in Macau gaming market,
including exposure to potential oversupply in gaming facilities,
2) Weak liquidity profile, particularly towards the end of FY2007
when peak funding for its construction projects is expected, 3)
Exposure to potential construction cost and time overruns for the Cotai
Mega Resort, 4) Short track record of operations with the company
not expected to generate positive operating cash flow until 2006,
and 5) Sourcing and retaining appropriate labour force to staff operations.
At the same time, the rating reflects various strengths: 1)
Galaxy holds one of five operating concessions/ sub-concessions,
allowing it to conduct gaming activities in Macau, 2) Well positioned
to benefit from the expected strong growth in Macau gaming industry,
3) Securing of various parcels of land to build new casino complexes,
4) Large portion of operating costs are variable, and 5) Potential
for material improvements in the company's credit profile,
should it achieve its base case projections.
Galaxy's current and planned casino operations will be heavily exposed
to Macau's rapidly developing gaming market. On the demand
side, most of the anticipated growth in visitors is expected to
come from mainland China, where household incomes are rising and
travel restrictions are being relaxed. On the supply side,
a significant number of new gaming facilities and resorts is expected
to open in Macau within the next 4 years. As a result, supply
could exceed demand at certain points in the medium to long term.
However, Moody's gains comfort from the fact that current
demand exceeds supply and Galaxy's initial operations have been
both profitable and cash flow positive. Moreover, most of
its cost base is expected to be variable in nature, dominated by
volume-based gaming taxes and fees paid to VIP promoters and junket
operators. Most labour costs are also expected to be variable.
As a result, it has a reasonable degree of flexibility to reduce
costs in response to any fall in demand, mitigating to some extent
its exposure to supply/demand imbalances within the Macau market.
Moody's notes the Macau gaming industry will remain subject to regulatory
and other controls from the Macau and Chinese governments. In such
a context, Galaxy remains exposed to the potential for new concessions
to be issued post 2009 as well as to any hikes in tax rates, although
there are currently no indications that taxes will be raised. The
supply of labour for both construction and casino operations may also
become an issue unless regulatory restrictions are relaxed to allow additional
labour into Macau. Moody's notes that current restrictions
have resulted in material increases to average wages for construction
and casino staff in the last 2 years. In addition, tightening
of travel restrictions for mainland Chinese to Macau, which Moody's
does not expect to occur in the near to medium term, would have
a material negative impact on the projected gaming revenue growth.
Galaxy's liquidity profile is expected to weaken, particularly
in 2007, when the bulk of construction costs associated with Phase
1 of the Cotai Mega Resort are payable. As the company has not
obtained final building and construction approval from the Macau government
and no construction contracts have been agreed, it remains exposed
to potential cost increases and time delays.
Moody's expects that Galaxy may have a stronger financial profile
in a relatively short period of time if it achieves its projected growth.
However, the risks associated with the ramp-up of operations
at its new casinos are expected to restrain the company's credit
rating in the short to medium term.
The rating may come under upward pressure if: 1) if the above concerns
surrounding the ramp-up of operations are appropriately resolved
and Galaxy establishes a track record of operations from its new StarWorld
casino, 2) the company reduces their exposure to potential cost
overruns associated with the construction of the Cotai Mega Resort,
and 3) the company achieves the key financial metrics of total coverage
above 2.0x-2.5x and adjusted operating cash flow
to adjusted debt greater than 15%-20% on a sustainable
basis. Any upward rating movement would also take into consideration
the company's ongoing exposure to potential increases in construction
costs as additional phases of the Cotai Mega Resort are instigated.
On the other hand, the rating may come under downward pressure should
there be a material deterioration in the company's liquidity and
financial profile. This may emerge if volumes of gamblers using
Galaxy's facilities fall below expectations or construction costs
increase materially above expectations. Such weakness may be evidenced
by the following financial metrics: 1) total coverage remaining
below 2.0x and 2) adjusted operating cash flow to adjusted debt
less than 10-15% on a sustainable basis. The up streaming
of funds to the parent entity - via dividends, share buyback's
or loans - during the construction phase of various casino projects
would also place negative pressure on the company's financial profile
and the rating.
Galaxy is a casino operator based in Macau. Current operations
are focused on one complex called the Waldo Hotel. The company
plans to open additional casinos, including StarWorld and the Cotai
Mega Resort over the next 3 years in Macau.
Corporate Finance Group
Moody's Investors Service Pty Ltd
JOURNALISTS: (612) 9270-8102
SUBSCRIBERS: (612) 9270-8100
Corporate Finance Group
Moody's Investors Service Pty Ltd
JOURNALISTS: (612) 9270-8102
SUBSCRIBERS: (612) 9270-8100
No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.
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