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Rating Action:

Moody's upgrades Studio City's CFR to B1; outlook stable

21 May 2018

Hong Kong, May 21, 2018 -- Moody's Investors Service has upgraded Studio City Finance Limited's corporate family rating (CFR) to B1 from B2 and its senior unsecured rating to B2 from B3.

At the same time, Moody's has also upgraded the senior secured ratings of Studio City Company Limited, a wholly owned subsidiary of Studio City Finance, to Ba3 from B1.

The rating outlooks are stable.

RATINGS RATIONALE

"The ratings upgrade reflects Studio City's improving business profile, following its successful ramp-up and the recovery in Macao's overall gross gaming revenue (GGR) since 3Q2016, which has in turn enhanced its earnings and credit metrics," says Stephanie Lau, a Moody's Vice President and Senior Analyst.

"The rating action also reflects a one-notch uplift based on Moody's expected likelihood of extraordinary support from its parent - Melco Resort & Entertainment Limited - given Studio City's increasing importance to the parent and the parent's solid financial flexibility," adds Lau.

In 2017, Studio City Finance's adjusted EBITDA grew 174% year-on-year to USD276 million and Moody's expects the company's adjusted EBITDA to further grow to around USD315-330 million in the next 12-18 months, driven by Macao's steady GGR growth and better cost efficiency.

Macao's GGR increased by 20.5% year-on-year in 1Q 2018, demonstrating seven consecutive quarters of year-on-year growth. In particular, mass-market gaming revenue has shown a more evident recovery since 4Q 2017, a trend that will benefit Studio City because it focuses on mass-market gamblers and family-oriented non-gaming activities.

The B1 rating also reflects the limited financial and execution risks arising from Studio City's potential phase two construction. Such a view is supported by our expectation of manageable levels of capital spending and support from phase one's operating cash flow.

Execution risk will also be lower because of a smaller targeted area versus the previous phase, which was a greenfield project.

Given these assumptions, Moody's projects that Studio City Finance's adjusted debt/EBITDA will register 6.7x-7.0x and EBITDA/interest 1.9x-2.0x over the next 12-18 months, absent the potential IPO of Studio City Finance's holding company -- Studio City International Holdings Ltd. -- or equity injections. These levels of ratios are in line with its B2-level standalone credit quality, although they are at the weak end.

As of 31 December 2017, Studio City Finance's USD351 million in cash, in addition to adjusted operating cash flow projected at around USD180-200 million, is sufficient to fully cover its capital spending in the next 12 months. The company has no short-term debt outstanding.

Studio City Finance's senior unsecured bond rating is one notch lower than it would otherwise be because of the risk of legal subordination. This risk reflects the fact that its sizeable secured debt has priority over the senior unsecured bondholders at the holding company in a bankruptcy scenario.

On the other hand, Studio City Company Limited's senior secured rating is one notch above Studio City Finance's CFR, reflecting the first lien on the company's major assets. This structure means that the bonds rank ahead of other unsecured claims and indebtedness.

The stable rating outlook reflects Moody's expectations that Studio City's operations will continue to improve, and that its credit metrics will remain stable over the course of its phase two construction.

Studio City Finance's ratings could be upgraded if it enhances its scale and financial profile. Specifically, upgrade pressure would emerge if its debt/EBITDA declines below 5.0.x-5.5x and EBITDA/interest rises above 3.0x on a sustained basis.

On the other hand, the ratings could be downgraded if it engages in a) aggressive expansion and capex spending; and/or b) its operations deteriorate, resulting in tight liquidity and high leverage on a sustained basis.

Specifically, downgrade stress would emerge if its debt/EBITDA exceeds 7.5x-8.0x and EBITDA/interest coverage falls below 1.8x on a sustained basis.

Also, a decline in the ability or willingness of its parent -- Melco Resorts & Entertainment -- to provide support will also lead to downgrade pressure.

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.

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

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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.

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.

Stephanie Lau
Vice President - Senior 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

Gary Lau
MD - Corporate Finance
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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