Hong Kong, November 08, 2021 -- Moody's Investors Service has affirmed Studio City Finance Limited's
B1 corporate family rating (CFR) and senior unsecured ratings.
The outlook on Studio City Finance remains negative.
"The rating affirmation recognizes (1) our view that the weakening
in Studio City Finance's capital structure amid the pandemic can
be accommodated within its current standalone credit profile, supported
by its equity raising in 2020 and its large financial buffer at the beginning
of the pandemic, and (2) the parent company's demonstrated
willingness to provide support to Studio City Finance," says
Sean Hwang, a Moody's Assistant Vice President and Analyst.
RATINGS RATIONALE
Moody's expects Studio City Finance's earnings to remain meaningfully
below pre-pandemic levels at least through 2022 because the recovery
in gross gaming revenue (GGR) in Macao SAR, China, will likely
be gradual and bumpy. This expectation factors in the likely pattern
of travel resumption and temporary suspensions, mainland China's
control over visa issuances, and the uncertain lifting of quarantine
requirements for travelers from Hong Kong SAR, China.
Moody's has therefore lowered its forecasts on Macao's mass-market
GGR in 2022 to around 60% of the 2019 level, and expects
a near-full recovery only in 2023. Moody's also forecasts
the city's VIP gaming revenue in 2023 will remain substantially below
the 2019 levels, given the increasing regulatory scrutiny over the
segment and the weakened junket sector. However, this situation
will have limited impact on Studio City Finance's earnings given
the VIP segment's low earnings contribution.
Moody's expects that the weak earnings and operating cash flow during
2021-22 will lead Studio City Finance to fund a significant part
of its phase-two capital spending with additional debt until 2022.
In this regard, Moody's projects Studio City Finance's
adjusted debt will grow to around $2.5 billion over the
next 12-18 months from $2.1 billion as of 30 June
2021.
That said, the pace of Studio City Finance's debt growth has
been mitigated by its substantial equity raising of $500 million
in August 2020, which will help cover part of the company's
capital spending and cash burn through 2022.
This equity raising also reinforces Moody's view of likely financial
support from the parent, Melco Resorts & Entertainment Limited
(MRE), in case of need, especially considering MRE's
undertaking at that time to underwrite the whole target amount.
Studio City Finance's ratings, therefore, continue to
incorporate a one-notch uplift from its standalone credit quality
to reflect this likelihood of parental support.
In addition, Moody's expects Studio City Finance's earnings
in 2023 to increase with the opening of its phase-two towers,
which will house 900 hotel rooms and other nongaming attractions such
as a large-scale waterpark. The additional amenities will
likely drive additional traffic to the company's gaming facilities.
Given the balance of these factors, Moody's forecasts Studio
City Finance's adjusted debt/EBITDA will be around 7.0x-7.5x
in 2023, which still can be accommodated within its standalone credit
quality. While this ratio is significantly higher than 4.1x
in 2019, the 2019 leverage was strong for Studio City Finance's
standalone credit quality and, therefore, provided ample financial
headroom.
Studio City Finance's B1 ratings continue to reflect its improved
market position after the successful ramp-up of its property,
which is counterbalanced by its geographic concentration in Macao.
In Moody's view, Studio City Finance's liquidity will
be slightly insufficient to cover its capital spending and other uses
over the next 12 months. However, this risk is mitigated
by the company's ability to adjust its capital spending and the
parent's ability to provide liquidity support in case of need.
In terms of environmental, social and governance (ESG) considerations,
the ratings factor in the high concentration of ownership in MRE and ultimately
in a controlling shareholder. These risks are mitigated by likelihood
of support from the parent company and the recent track record of significant
equity financing.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The negative outlook reflects the likely marginally high financial leverage
in 2023 and lingering uncertainty around the pace and extent of earnings
recovery.
Studio City Finance's outlook can return to stable if the company
improves its earnings and maintains a balanced financial policy,
such that its debt/EBITDA falls below 7.5x-8.0x and
EBITDA/interest exceeds 1.8x on a sustained basis.
On the other hand, Studio City Finance's ratings could be
downgraded if (1) its operations are unlikely to recover sufficiently
or (2) its debt-funded capital spending exceeds expectations,
resulting in strained liquidity or high leverage on a sustained basis.
Specifically, downward rating pressure is likely to emerge if its
debt/EBITDA exceeds 7.5x-8.0x and EBITDA/interest
remains below 1.8x on a sustained basis.
The principal methodology used in these ratings was Gaming published in
June 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1276316.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
Studio City Finance Limited, through its subsidiaries, develops
and operates the Studio City property, an integrated gaming and
entertainment resort in Macao. The company's holding company,
Studio City International Holdings Limited, is listed on the New
York Stock Exchange and is around 55% owned by Melco Resorts &
Entertainment Limited.
REGULATORY DISCLOSURES
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analysis, see the sections Methodology Assumptions and Sensitivity
to Assumptions in the disclosure form. Moody's Rating Symbols and
Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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Sean Hwang
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Chris Park
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
