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Rating Action:

Moody's reviews Melco group companies for downgrade

16 Mar 2020

Hong Kong, March 16, 2020 -- Moody's Investors Service has placed under review for downgrade the ratings of Melco Resorts Finance Limited (MRF), Studio City Finance Limited (Studio City Finance) and Studio City Company Limited (Studio City Company).

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

The outlooks for the three entities have been changed to rating under review from stable.

RATINGS RATIONALE

"The review for downgrade reflects our expectation that the Melco group companies' very weak earnings and cash flow amid the coronavirus outbreak will significantly stretch their financial metrics, at least through 2020," says Sean Hwang, a Moody's Analyst.

"In particular, protracted weakness in their core Macau businesses will likely lead to significant negative free cash flow and erode the companies' balance sheet strength," adds Hwang.

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 the Melco group companies' credit profile, including its exposure to Macau have left it vulnerable to shifts in market sentiment in these unprecedented operating conditions and the companies remain vulnerable to the outbreak continuing to spread.

We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. Today's actions reflect the impact on the Melco group companies of the breadth and severity of the shock, and the broad deterioration in credit quality it has triggered.

The Melco group under Melco Resorts & Entertainment Limited (MRE) generates most of its consolidated EBITDA from its gaming operations in Macau, where gaming revenue dropped 88% in February 2020 from a year earlier. The steep decline was the result of quarantine and travel restrictions put in place by both China's and Macau's governments, along with public fear of contagion and a 15-day mandatory casino closure during the month.

Moody's expects a severe double-digit drop in the group's revenue this year from a year earlier, and a much larger drop in EBITDA, given significant fixed expenses. Consequently, MRE's and Studio City Finance's adjusted debt/EBITDA will likely more than double in 2020 from the estimated 3.4x and 4.2x for 2019.

The drop in earnings coupled with the companies' planned capital spending for the year -- including the Studio City phase two expansion and MRE's integrated resort development in Cyprus -- also means the companies will likely record significant negative free cash flow this year.

In a scenario with a severe and prolonged outbreak, the companies' large negative free cash flow would materially reduce liquidity holdings or increase debt, or both.

While Moody's expects the companies' operating performance and financial metrics will recover once the virus-related disruptions ease, the timing and pace of such recovery remains highly uncertain.

That said, MRE held consolidated cash of $1.4 billion at the beginning of 2020, which Moody's expects to be sufficient to cover its cash needs for the next 12 months. And while Studio City Finance's existing cash will be insufficient to cover the planned capital spending for this year, this concern is mitigated by the likelihood of support from the parent in case of need and Moody's view that spending can be delayed as needed depending on the arrangement of necessary funding.

MRF's credit quality and ratings are driven by the consolidated credit quality of its parent, MRE, given that MRF is 100%-owned by MRE with limited ring-fencing mechanisms. In addition, Moody's expects MRE will continue to rely heavily on MRF for profit generation and funding.

Studio City Finance's ratings continue to incorporate a one-notch uplift 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.

The ratings also factor in the companies' exposure to changing demographics and consumer preferences, as well as the high concentration of ultimate ownership in a controlling shareholder. These risks are mitigated by the Melco group's good track record of managing the social aspect of its operations, the positioning of its core market of Macau as a destination gaming hub, and the board oversight exercised through independent board directors.

Moody's review will focus on (1) developments associated with the coronavirus-related disruptions and its effects on the companies' operations and capital structure; (2) the severity and length of the slump in gaming revenue; and (3) the companies' ability to preserve liquidity during this challenging period.

The ratings could be downgraded if Moody's believes the companies' earnings and financial metrics are unlikely to recover to pre-coronavirus levels in a timely manner or if their 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.

The principal methodology used in these ratings was Gaming Industry published in December 2017. 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 based 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 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.

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.

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
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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