Skycity Entertainment Group Placed On CreditWatch Negative On Casino Closures

  • Government-led casino closures aimed at containing the spread of COVID-19 will generate negative cash flows at Skycity's New Zealand and Australian assets. We believe these measures could compromise the group's ability to maintain an adjusted debt-to-EBITDA ratio below 3.0x during a period of significant capital expenditure.
  • In our view, the group has a solid track record of prudent balance sheet management and ratings stability. The company is publically committed to maintaining the 'BBB-' rating, which we believe implies that it will take all reasonable actions to protect the interests of creditors.
  • On March 24, 2020, S&P Global Ratings placed the 'BBB-' long-term issuer credit rating on Skycity and 'BBB-' issue credit rating on the company's debt on CreditWatch with negative implications.
  • The CreditWatch negative placement reflects our view that operational closures across Skycity's key casino assets, together with the funding of significant capital expenditure, may cause Skycity's adjusted debt-to-EBITDA to materially exceed 3.0x 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 Skycity ratings on CreditWatch with negative implications because we believe government-led casino closures will generate negative cash flows at Skycity's New Zealand and Australian assets. The extent and duration of the casino closures are uncertain, and so too, is the rate of earnings recovery following the closure period. Skycity has significant earnings concentration at its highest quality asset, the Auckland casino, which comprises more than 70% of group earnings.
We believe a prolonged closure could compromise the group's ability to maintain leverage in line with the 'BBB-' rating. The group is undertaking significant development activity across its Adelaide development and rebuild of the New Zealand International Convention Centre (NZICC). The concurrence of COVID-19 is likely to test the company's capital allocation framework, including its ability to maintain adjusted debt to EBITDA below 3.0x.
In our view, the group has a solid track record of prudent balance sheet management and ratings stability. The company is publically committed to maintaining the 'BBB-' rating, which we believe implies that it will take all reasonable actions to protect the interests of creditors. Levers to support balance sheet health include recalibrating shareholder returns, noncore assets sales, as well as near-term operating and capital expenditure decisions. The company has previously raised equity to support its balance sheet.
As the situation evolves, the group's liquidity and covenant compliance will be key. The group has NZ$337 million in undrawn bank facilities and is expecting a cash inflow of about NZ$85 million from insurance payments in April to cover certain capital expenditure requirements. 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. Skycity's next debt maturity comprises NZ$50 million of drawn syndicated bank debt due on June 30, 2020, followed by a hedged US$100 million U.S. private placement note due in March 2021.
The CreditWatch negative placement reflects our view that operational closures across Skycity's key casino assets, together with the funding of significant capital expenditure, may cause Skycity's adjusted debt-to-EBITDA to materially exceed 3.0x over the next one to two years.
We will continue to monitor Skycity'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. 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 Skycity's capital allocation framework and cash preservation initiatives will be sufficient to prevent a material erosion of available liquidity and debt to EBITDA from sustaining above 3x over the next one to two years. This would likely be dependent on active management of the group's cost base and potentially more proactive measure to shore-up the group's balance sheet.

We revised Skycity's liquidity to adequate from strong given that the group is undergoing a period of significant development activity across its Adelaide and Auckland assets. In our view, Skycity's sources over uses will be greater than 1.2x over the next six months.
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