Fitch Ratings has published Genting Malaysia Berhad’s (GENM) Long-Term Issuer Default Rating (IDR) of ‘BBB’. The Outlook is Negative. At the same time, Fitch has assigned GENM’s proposed US dollar notes a ‘BBB’ rating.
The notes will be issued by GENM Capital Labuan Limited, a wholly owned subsidiary of GENM, and guaranteed by GENM. The notes are rated at the same level as GENM’s IDR as they will constitute direct, unsecured and unsubordinated obligations of the company. The company plans to use the proceeds mainly to refinance debt.
GENM owns Malaysia’s only casino, Resorts World Genting, which is located close to the capital Kuala Lumpur and attracted close to 29 million visitors in 2019. GENM’s rating considers its moderate linkage to its weaker parent, Genting Berhad (GENB, BBB/Negative), andrate GENM based on GENB’s consolidated credit profile and the Outlook is aligned with that of GENB.
The Negative Outlook captures the risk of a slower gaming recovery from the coronavirus pandemic impact than we forecast, such that GENB’s leverage is elevated for an extended period. This may result from recurring waves of infection, leading to sporadic lockdowns and continued strict social distancing.
KEY RATING DRIVERS
Licence Exclusivity Underpins Credit Profile: GENM’s credit profile benefits from its exclusive licence to operate a casino in Malaysia and stability from the mass-market, domestic-focused operation, relative to peers in more competitive markets with higher exposure to the volatile VIP segment. GENM’s domestic-focused operation also means the company is better positioned for a faster post-pandemic recovery than peers in destination markets, where recovery depends on resumption of cross-border travel.
GENM’s Malaysia operations’ revenue and EBITDA for 3Q20 reached 66% and 79% of the 3Q19 levels, respectively, thanks to pent-up demand from domestic patrons. Contribution from VIPs also improved, as those who usually play overseas stayed home due to border closures. Performance tapered off after the re-imposition of interstate travel curbs to contain rising infections and a temporary closure at the start of 2021, but the jump in gross gaming revenues when there are no travel bans shows resilient domestic demand, which supports GENM’s recovery.
Fitch expects GENM’s EBITDA to return to pre-pandemic levels and net debt/EBITDA to fall to below 3x by end-2022 on healthy demand. However, recovery could be delayed in the event of recurrent, aggressive measures to combat surges in infections, including the resort’s temporary closure, although the progressive ramp-up of vaccination may help. A movement control order for around one month led to a drop in average daily visitors to 15,000 from mid-October to early December 2020 from 48,000 in 3Q20 and 79,000 in 2019.
On operating flexibility, GENM’s cost-cutting initiatives have helped to reduce cash burn and preserve liquidity amid falling revenues. The company cut its workforce and salaries to match the fall in operating capacity to around 50% of the pre-pandemic levels in Malaysia and 25% in the US. These efforts resulted in higher EBITDA margins from the Malaysia and US operations in 3Q20 and 4Q20 compared to 2019, despite lower revenues.
Fitch expects Genting to continue maintaining financial discipline and operating flexibility to preserve liquidity. This, coupled with moderating capex, should help the company to deleverage in one to two years, in line with expectations of gradual demand recovery.
There will be major project completions in 2021, a total of RM 1billion of capex is expected 2021, and MYR500 million-600 million annually thereafter, mainly for maintenance capex. The company is on-track to open an outdoor theme park at Resorts World Genting and a hotel at Resorts World New York City in mid-2021. Its expects the theme park to draw an additional 1.5-2 million visitors per year to Resorts World Genting and generate an additional MYR400 million-500 million in revenue.
DERIVATION SUMMARY
GENB and Crown Resorts Limited (BBB/Rating Watch Negative) have the same overall risk profile, and they are therefore rated at the same level.
GENB has larger and more diversified operations than Crown, both in terms of geography and non-gaming contributions. However, this is offset by Crown’s stronger financial profile, such that Crown is expected to deleverage faster than GENB to 1.7x by June 2022, supported by healthy domestic demand, and completion of major capex. The Rating Watch Negative on Crown’s ratings highlights increased risk of severe regulatory actions, including a loss of licence in Sydney and the potential for further regulatory action by the Victorian and Western Australian regulators, which could significantly affect the company’s business and financial profiles and lead to Fitch downgrading its ratings
GENB is rated higher than Las Vegas Sands Corp (LVS, BBB-/Negative) due to its more diversified gaming operation and record of maintaining a more conservative balance sheet. The rating also benefits from business diversification from its plantation and energy segments. The more favourable business profile than LVS stems from license exclusivity in its key operations in Singapore and Malaysia. This is in contrast to LVS’s high reliance on Macao, where the market is more competitive, and the risks around its concession renewal, which is due in June 2022. The Negative Outlook on LVS considers the uncertainty surrounding the use of proceeds from the disposal of its Las Vegas assets, such as a more aggressive shareholder return policy than what Fitch would consider commensurate with the operating recovery, which we believe could lead to rating pressure.
KEY ASSUMPTIONS
EBITDA improves to MYR1.7 billion in 2021 and returns to 2019 level of MYR2.6 billion by end-2022. This is supported by expectation of a gradual recovery in demand and additional revenue from the opening of the outdoor theme park in 2H21. MYR1 billion in capex in 2021, and MYR500 million-600 million per year thereafter, lower dividends in 2021, and returning to 80% of net income from 2022.
