Crown Resorts Ltd. Placed On CreditWatch Negative On Casino Closures

  • The Australian Commonwealth and state governments' closure of non-essential businesses, including casinos, to contain the spread of COVID-19 will severely cut Crown's revenues, earnings, and cash flow generation during the closure period, amid significant development activity at Crown Sydney. We believe prolonged casino closures will likely compromise the group's ability to maintain an adjusted debt-to-EBITDA ratio below 3.0x.
  • In our view, the group has a solid track record of prudent balance sheet management and ratings stability. The company is committed to an investment-grade rating, which we believe implies that it will take all reasonable actions to protect the interests of creditors. Nevertheless, the deteriorating operating environment may test the effectiveness of Crown's financial policies.
  • On March 24, 2020, S&P Global Ratings placed the 'BBB' long-term issuer credit rating and 'A-2' short-term issuer credit rating on Crown, as well as 'BBB' issue credit ratings on Crown's debt, on CreditWatch with negative implications.
  • The CreditWatch placement reflects our view that operational closures across Crown's key casino assets, together with the funding of significant capital expenditure, may cause adjusted debt to EBITDA to materially exceed 3x over the next one to two years.
MELBOURNE (S&P Global Ratings) March 24, 2020—S&P Global Ratings today took the rating actions listed above.
We placed the Crown Resorts ratings on CreditWatch with negative implications because we believe government-led casino closures will generate negative cash flows at Crown's main profit engines, Crown Melbourne and Crown Perth. As a result, we believe a prolonged closure could compromise the group's ability to maintain leverage in line with the 'BBB' rating. The extent and duration of the casino closures are uncertain, and so too, is the rate of earnings recovery following the closure period. Crown has significant revenue concentration at its highest quality asset, Crown Melbourne, which comprises about 60% of group revenues.
Further, leverage will materially increase over the next 12 months due to significant development activity at Crown Sydney, which is likely to complete at the end of calendar 2020. As a result, we believe prolonged casino closures will likely compromise the group's ability to maintain debt-to-EBITDA ratio below 3.0x during the peak of the construction build.
Nevertheless, Crown has built a solid ratings buffer over the past three years. This includes S&P Global Ratings-adjusted debt to EBITDA of under 0.5x as of Dec. 31, 2019. The buffer is partly attributable to the company's move to protect its balance sheet and de-risk its portfolio following a period of earnings volatility in 2016-2017.
In our view, the group has a solid track record of prudent balance sheet management and ratings stability. The company is committed to maintaining an investment-grade rating, which we believe implies that it will take all reasonable actions to protect the interests of creditors. We believe the company has a number of available levers to support balance sheet health including recalibrating shareholder returns, noncore assets sales, as well as near-term operating and capital expenditure decisions. Nonetheless, an extended casino closure period and associated cash outflows may test the effectiveness of the group's financial policies to maintain minimum liquidity levels in excess of A$500 million.
We believe Crown's significant available cash holdings and undrawn bank facilities will cover the group's capital expenditure and other cash outflows over the next six to 12 months. The group has A$200 million in undrawn bank facilities and unrestricted cash of about A$300 million (after dividend payment and excluding our assumption of about A$150 million in cage cash). These sources of cash do not include likely settlement proceeds from Crown Sydney apartment sales. Moreover, we do not incorporate any financial support from parent Consolidated Press Holdings Pty Ltd., for which we believe Crown Resorts is a core subsidiary. We believe the group is committed to completing its major development projects underway, but has a greater level of flexibility on future projects and some flexibility with maintenance capital expenditure. Crown also has no material debt maturities over the next 12 months.
The CreditWatch negative placement reflects our view that operational closures across Crown's key casino assets, together with the funding of significant capital expenditure, may cause Crown's adjusted debt-to-EBITDA ratio to materially exceed 3.0x over the next one to two years.
We will continue to monitor Crown's operational and capital management initiatives over the next 90 days to ascertain whether the company's efforts to reduce costs will be sufficient to offset the challenging and evolving operating environment and support an adequate liquidity profile.
We could lower the rating if operational closures are prolonged such that we forecast adjusted debt to EBITDA to sustain above 3.0x over the next one to two years. We will also continue to monitor settlement risk associated with the Crown Sydney apartment sales. Based on our current expectations regarding the likely timing and impact of the casino closures, we do not expect a downgrade, if any, to exceed one notch.
We could resolve the CreditWatch and affirm the 'BBB' issuer credit rating with a stable outlook if we believe that Crown's financial policies and cash preservation initiatives will be sufficient to prevent a material erosion of the group's available liquidity. In addition, debt to EBITDA remaining comfortably below 3x during the peak of the Crown Sydney construction build will further support such a rating action. This upside scenario would likely be dependent on an improving economic outlook from the containment of the COVID-19 outbreak and ongoing active management of the group's cost base.
We revised Crown's liquidity to adequate from strong, given the likely negative cash generation and the development of Crown Sydney currently underway. In our view, Crown's sources over uses will be greater than 1.2x over the next six months. Supporting this assessment are the company's undrawn revolving facilities of about A$200 million and an unrestricted cash balance of about A$300 million after dividend payments.
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