Published on 20 Aug 2019.
RAM Ratings views as credit negative Genting Malaysia Berhad’s (GenM or the Company) related-party acquisition of US-based loss-making Empire Resorts, Inc. (Empire Resorts), but does not expect to take any immediate rating action. The acquisition could potentially weaken GenM’s credit strength. Continued substantial losses at Empire Resorts and a possible demand on resources to support it could erode the Company’s balance sheet strength. We may also proportionately consolidate Empire Resorts, which will lead to increased debts. Additionally, the proposed related-party transaction potentially heightens governance concerns. We do not preclude further related-party transactions in the future, given the vast gaming-related businesses held by major shareholders of the Company. Meanwhile, the financial impact of the acquisition on GenM’s parent, Genting Berhad (Genting), is manageable given the latter’s size. GenM’s very close relationship with its parent and the support that it enjoys as a result, provides some buffer against immediate rating deterioration.
GenM proposes to acquire approximately 38% of Empire Resorts from Kien Huat Realty III Limited (KH) for USD128.60 mil (about RM538.80 mil). KH is a party related to GenM by virtue of shared ultimate major shareholders, specifically Tan Sri Lim Kok Thay. As the proposed acquisition does not exceed the threshold set by Bursa Malaysia Securities Berhad, no approval is required from shareholders. Subsequent to the acquisition, the two parties propose to privatise Empire Resorts through a 49:51 joint venture between GenM and KH. The total acquisition and privatisation outlay by GenM amounts to about RM700 mil, while the investment will also be equity accounted. We view the said common shareholders as wielding significant influence over GenM and KH, and the Company is likely to extend financial and operational support to Empire Resorts. Pending conclusion of the proposed acquisition, we may proportionately consolidate Empire Resorts for our analytical purposes.
Publicly traded on the Nasdaq Stock Market, Empire Resorts owns and operates Resorts World Catskills (RWC) and Monticello Casino and Raceway in New York State in the US. Empire Resorts may remain mired in losses for the medium-term; it reported a net loss of USD73.73 mil for 1H FY Dec 2019 and USD138.82 mil for FY Dec 2018 as well as debts totalling USD566.65 mil as at end-June 2019. Its liquidity position is also weak, with cash and cash equivalents of USD38.02 mil against short-term debts amounting to USD46.09 mil as at end-June 2019.
GenM’s corporate credit ratings of AAA/Stable/P1 were reaffirmed on 25 July 2019. We had expected the Company’s earnings to be weaker in the near to medium term and borrowings to peak in 2019. Its net gearing ratio (including money market funds) is projected to climb to a high of 0.22 times this year and the next. GenM’s funds from operations net debt cover (net of cash and money market funds) is projected to deteriorate to below 0.70 times this year. While these metrics are still robust, proportionately consolidating Empire Resorts may result in a balance sheet considered weak for the Company’s ratings.
Subsequent to our reaffirmation of the ratings, however, GenM had announced the resolution of a dispute and signing of a restated memorandum of agreement with Fox Entertainment Group, LLC, in relation to a previously suspended outdoor theme park. The opening of this key attraction, widely anticipated to take place next year, was not factored into our reaffirmation of GenM’s ratings and is expected to provide some upside to earnings while cushioning the possible impact of the acquisition of Empire Resorts. Meanwhile, we understand GenM may be able to realise some revenue and cost synergies across Empire Resorts properties and Resorts World Casino New York City.
GenM is 49.5%-owned by Genting, a Bursa Malaysia-listed conglomerate. In view of the two entities’ very close relationship, GenM’s ratings are partly buffered by its parent’s credit profile. That said, any change in Genting’s credit profile will affect GenM’s ratings. We have reaffirmed Genting’s ratings concurrently with this media release (please refer to press release on Genting dated 20 August 2019).
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Ratings on Genting Malaysia Berhad