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Rating Action:

Moody's confirms Melco group companies' ratings; outlook negative

25 May 2020

Hong Kong, May 25, 2020 -- Moody's Investors Service has confirmed the ratings of Melco Resorts Finance Limited (MRF), Studio City Finance Limited (Studio City Finance) and Studio City Company Limited (Studio City Company) -- collectively addressed as the "Melco group".

The affected ratings are (1) MRF's Ba2 corporate family rating (CFR) and senior unsecured ratings; (2) Studio City Finance's B1 CFR and B2 senior unsecured rating; and (3) Studio City Company's Ba3 backed senior secured rating.

The outlooks for the three entities have been revised to negative from ratings under review.

This concludes the review for downgrade initiated on 16 March 2020.

RATINGS RATIONALE

"The ratings confirmation mainly reflects Melco group's strengthened liquidity buffers, allowing the group to withstand a meaningful but temporary cash burn caused by its weakened operating performance amid coronavirus-related disruptions," says Sean Hwang, a Moody's Assistant Vice President and Analyst.

Melco Resorts & Entertainment Limited (MRE) -- the ultimate holding company of the Melco group -- held consolidated cash of $1.2 billion at the end of March 2020 and signed a new $1.9 billion five-year revolving credit facility in April 2020, out of which $1.6 billion remained undrawn following the first drawdown in early May 2020. MRE also disposed of its 9.99% stake in Crown Resorts Limited (Baa2 negative) for around $355 million in April 2020. Moody's expects that these sources of liquidity will be sufficient to cover MRE's cash needs, at least for the next 12 months.

While Moody's expects Studio City Finance's liquidity sources will be insufficient to cover the expected cash burn and planned capital spending for the next 12 months, this concern is mitigated by the likelihood of support from its parent if needed. Also Moody's believes that its planned spending can be delayed as needed depending on how the necessary funding shapes up.

Moody's also expects the companies to retain access to funding, given the recent signing of the revolving credit facility and other global gaming companies' recent bond issuance.

"That said, the rating outlooks are negative, reflecting the lingering uncertainties over the timing and extent of future earnings recovery and our expectation for significant negative cash flow and debt growth that will continue until sufficient recovery takes hold," adds Hwang.

MRE's consolidated revenue declined 41% to $811 million in the first quarter of 2020 from $1,383 million a year earlier, mainly as a result of the stringent travel restrictions and facility closures in its key markets, namely Macau and the Philippines. This revenue decline has led to its reported EBITDA falling to $55 million from $388 million over the same period. Moody's expects the company's EBITDA to be negative in the second quarter of 2020.

The steep drop in earnings, coupled with the group companies' planned capital spending for the year -- including the Studio City phase two expansion and MRE's integrated resort development in Cyprus -- means that the companies will record significant negative free cash flow this year. Their large negative free cash flow will increase net debt levels.

While Moody's expects the companies' operating performance and financial metrics will recover once the coronavirus-related disruptions ease, the timing and pace of such recovery remains highly uncertain. In Moody's view, the prospect of recovery will rest mostly on the easing of quarantine requirements and China's resumption of the individual visa scheme for Chinese citizens visiting Macao. Moody's does not expect the companies' earnings in 2021 to recover fully to the 2019 levels.

MRF's credit quality and ratings are driven by the consolidated credit quality of its parent, MRE, because MRF is 100%-owned by MRE, and MRE relies heavily on MRF for profit generation and funding. MRE's credit quality, in turn, continues to benefit from the Melco group's established operations and high-quality assets, which support robust cash flow generation. This factor mitigates the risk associated with its geographic concentration in Macau and its increasingly aggressive financial policy.

Studio City Finance's ratings continue to incorporate a one-notch uplift from its standalone credit profile, reflecting Moody's view that its parent MRE is likely to extend extraordinary support to it in times of need, given the company's strategic importance to the parent and the parent's good liquidity holdings. Studio City Finance's standalone credit profile reflects its improved market position following the successful ramp-up of its property, which is counterbalanced by its geographic concentration in Macau and the expected debt growth as a result of its phase-two expansion project.

The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. The gaming sector has been one of the sectors most significantly affected by the shock given its sensitivity to consumer demand and sentiment. More specifically, the weaknesses in MRF's and Studio City Finance's credit profile, including their exposure to travel disruptions and discretionary consumer spending have left it vulnerable to shifts in market sentiment in these unprecedented operating conditions, and they remain vulnerable to the outbreak continuing to spread.

In terms of environmental, social and governance (ESG) considerations, the ratings also factor in the high concentration of ultimate ownership in a controlling shareholder. These risks are mitigated by the Melco group's good liquidity buffers and the board oversight exercised through independent board directors.

Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety. Today's action reflects the impact on these companies of the breadth and severity of the shock, and the broad deterioration in credit quality it has triggered.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

MRF's outlook can return to stable if the Melco group under MRE improves its earnings, contains debt growth and continues to maintain sizeable cash. This can be evidenced by MRE's adjusted debt/EBITDA falling below 4.5x-5.0x on a sustained basis.

MRF's ratings could be downgraded if Moody's believes that MRE's adjusted debt/EBITDA is unlikely to return to below 4.5x-5.0x on a sustained basis, due to a sustained weakness in earnings or a significant increase in debt, or if MRE's liquidity weakens significantly. This situation can result from a protracted severe impact of the coronavirus outbreak or continuation of an aggressive financial policy during the earnings downturn.

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) it engages in aggressive debt-funded capital spending, resulting in tight liquidity and 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 Industry published in December 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1099757. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Melco Resorts Finance Limited is a wholly-owned subsidiary of Melco Resorts & Entertainment Limited, which is listed on the NASDAQ exchange and is majority-owned by the Hong Kong-listed Melco International Development Ltd. All of Melco Resorts Finance's operations are currently located in Macau.

Through Melco Resorts (Macau) Limited, Melco Resorts Finance operates two wholly-owned casinos in the territory, namely, Altira Macau and City of Dreams. It also has non-casino focused operations at its Mocha Clubs, and provides both gaming and non-gaming services to Studio City.

Studio City Finance Limited is a holding company incorporated in the British Virgin Islands. Through its subsidiaries, it develops and operates the Studio City property, an Asian-focused integrated gaming and entertainment resort located at Cotai in Macau.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity 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.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. Unless noted in the Regulatory Disclosures as a Non-Participating Entity, the rated entities are participating and the rated entities or their agent(s) generally provide Moody's with information for the purposes of its ratings process. Please refer to www.moodys.com for the Regulatory Disclosures for each credit rating action under the ratings tab on the issuer/entity page and for details of Moody's Policy for Designating Non-Participating Rated Entities.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.

Sean Hwang
AVP - 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

No Related Data.
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