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Related Issuers
Rating Action:

Moody's upgrades Studio City Finance's senior unsecured rating to B1; assigns B1 to new proposed notes; outlook negative

07 Jul 2020

Hong Kong, July 07, 2020 -- Moody's Investors Service has upgraded Studio City Finance Limited's senior unsecured ratings to B1 from B2, and has assigned a B1 rating to its new proposed senior unsecured notes.

The outlook on Studio City Finance's ratings is negative.

Studio City Finance plans to use the proceeds from the new notes to refinance Studio City Company Limited's senior secured notes due in 2021 and partially fund its capital spending.

RATINGS RATIONALE

"The upgrade of Studio City Finance's senior unsecured rating reflects lower subordination risk for senior unsecured bondholders, following the planned redemption of the company's secured debt," says Sean Hwang, a Moody's Assistant Vice President and Analyst.

Studio City Finance's senior unsecured ratings are now on par with the company's B1 corporate family rating, given Moody's expectation that after the refinancing, senior unsecured obligations will dominate the company's liability structure.

"In addition, the planned note issuance and equity offering are credit positive because they will boost the company's liquidity and offset the impact of coronavirus-induced operating disruptions on its capital structure," adds Hwang.

Along with the proposed notes offering, Studio City International Holdings Limited plans to raise approximately USD450 million - USD500 million in new equity. Melco Resorts & Entertainment Limited (MRE), the ultimate parent company, will commit to purchasing any equity not taken up by other investors to ensure approximately USD450 million - USD500 million of gross proceeds are raised. Net equity proceeds will be contributed to Studio City Finance.

Moody's expects the equity and bond transactions will increase Studio City Finance's liquidity which should be sufficient to cover the company's cash needs over the next 12 months, including its ongoing cash burn and phase two expansion capital spending. The company will also have no material debt maturities until 2024, once the 2021 notes are repaid.

Moody's also believes that this development demonstrates parental support for Studio City Finance and Melco group's prudent financial policy.

That said, the rating outlook remains negative, reflecting Moody's expectation for a steep drop in earnings and sizeable negative free cash flow this year amid coronavirus-related disruptions and the uncertainty around recovery prospects.

Studio City Finance reported a negative EBITDA of USD18 million for the first quarter of 2020, compared with USD85 million in positive EBITDA a year earlier. Moody's believes the loss will be deeper in the second quarter, given the very low level of gaming activity in Macao SAR.

While Moody's expects Studio City Finance's earnings and cash flow to improve gradually from the second half of 2020 once disruptions ease, we believe the company's financial metrics in 2021 will fall short of 2019 levels. In addition, there is significant downside risk to this assumption.

Studio City Finance's B1 ratings continue to incorporate its standalone credit quality and a one-notch uplift, reflecting Moody's expectation of extraordinary support from MRE in times of need, given Studio City Finance's strategic importance to its parent.

The standalone credit quality reflects the improved competitive standing of its Studio City property following a successful ramp up of casino operations since its opening in 2015, which is counterbalanced by the risk associated with the company's geographic concentration in Macao SAR.

In terms of environmental, social and governance (ESG) considerations, the ratings factor in Melco group's conservative financial policy, as evidenced by Studio City International Holdings Limited's proposed equity offering.

Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the impact of the related disruptions on the company's operations and substantial implications for public health and safety.

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

Given the negative outlook, a ratings upgrade is unlikely. But Studio City Finance's outlook could 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, Moody's could downgrade Studio City Finance's ratings 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, credit metrics indicative of a downgrade include its debt/EBITDA above 7.5x-8.0x and EBITDA/interest 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.

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 Macao SAR.

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.

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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 entity is participating and the rated entity or its agent(s) generally provides 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.

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
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

No Related Data.
© 2023 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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