Genting Bhd., RWLV Ratings Placed On CreditWatch Negative On Potential Investment In Empire

  • In our view, Genting's proposed acquisition of a stake in U.S.-based casino operator Empire Resorts Inc. will strain its already weakened leverage over the next two years, if the acquisition goes through.
  • We see a risk of Malaysia-based Genting's credit metrics deteriorating in the next 90 days. We believe Genting would likely support Empire's outstanding debt to maintain Resorts World Catskills' brand and reputation, a development that comes as the Genting group's capex is already at a peak.
  • On Aug. 15, 2019, S&P Global Ratings placed its 'A-' long-term issuer rating on Genting Bhd. on CreditWatch with negative implications. We also placed the 'BBB+' long-term issuer credit rating on Genting's subsidiary Resorts World Las Vegas LLC (RWLV) on CreditWatch negative.
  • We will resolve the CreditWatch status after there is clarity on Genting acquiring a 49% stake in Empire and Empire's debt resolution plan.
SINGAPORE (S&P Global Ratings) Aug. 15, 2019—S&P Global Ratings today took the rating actions listed above.
We placed the ratings on Genting and subsidiary RWLV on CreditWatch negative to reflect the high likelihood that the Empire board will accept the preliminary non-binding proposal, from Genting Malaysia (GenM) and Kien Huat Realty III Ltd., to take the company private and become part of Genting. Genting's strategy to embark on the acquisition of a 49% stake in Empire, although not unrelated to its core business, strains its leverage. We note that Genting's capital expenditure (capex) is already elevated due to ongoing expansion at the Singapore and Las Vegas properties.
We are cognizant that Genting's plan to bring its U.S. operations under one umbrella--GenUSA--will help it further its Resorts World brand in the U.S. market. This acquisition could also support Genting's notably large development in Las Vegas by cementing Genting's brand outside Asia.
The group's decision to invest in Empire resorts comes as it already has two major projects underway--the GenS expansion in Singapore, and construction at RWLV in Las Vegas. Capex for both these projects has already reduced the financial headroom available under our ratings trigger threshold. This new acquisition in two parts--13.2 million shares initially, followed by an additional 3.66 million shares (a total 49% stake)--for Empire's privatization will further strain Genting's leverage, in our view.
In addition, we believe Genting may support Empire's outstanding debt, which totaled about US$640 million as of June 30, 2019, to preserve Resorts World Catskills' brand and reputation. This could further increase Genting's leverage since we might consider this a contingent liability. In this case, we expect Genting's ratio of debt to EBITDA to stretch to about 2x in 2020, an increase of 0.3x without the Empire acquisition. By 2021, the ratio would revert to around 1.5x.
Empire is the 100% owner and operator of Montreign Operating Co. LLC (the parent of Resorts World Catskills). The delayed ramp-up of Resorts World Catskills has led to deteriorating liquidity at Empire, such that the company has been incapable of managing its fixed charges--interest, scheduled principal amortization, and minimal working capital--using operating cash flows.
We believe Genting's strategies have turned aggressive compared with the last few years. Its financial buffers have thinned, and any further strain on cash flows, due to acquisitions, cash support to subsidiaries, or any operating downturn at its Malaysia or Singapore properties, will tip the debt to EBITDA ratio beyond the threshold for the downgrade trigger, in our view.
In our opinion, RWLV's importance to Genting will remain unchanged over the next 12–24 months. Genting will continue to support RWLV in the construction and initial ramp-up phase. We continue to assess RWLV as a highly strategic subsidiary.
We placed the ratings on CreditWatch negative given the risk of an increase in leverage if the Genting group acquires a 49% stake in Empire, combined with the risk of providing support for Empire's outstanding debt and ongoing operations.
We aim to resolve the CreditWatch over the next 90 days after we have a better understanding of Empire's debt-resolution plans.
We are likely to lower the rating by one notch if the proposed privatization of Empire goes through, such that Genting holds a 49% stake in Empire. This also assumes that Empire does not go into bankruptcy and that Genting will support Empire's debt and operations to preserve its brand name and reputation. This would mean that debt to EBITDA could be above 1.5x for the next two to three years.
We could affirm the ratings and remove them from CreditWatch if the Empire transaction does not materialize or debt at Empire is restructured to significantly reduce the likelihood of Genting providing support to Empire's debt. An affirmation would also be contingent on the company maintaining financial prudence and its growth strategy not placing any further pressure on leverage over the next two years.
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