Published on 04 Sep 2020.
RAM Ratings has downgraded the ratings of Genting Berhad (Genting or the Group) and Genting Malaysia Berhad (GenM) to AA1, from AAA. Concurrently, we have revised the outlook on the ratings to negative from stable. The rating actions are premised on our expectations of significantly weaker performance and financial profiles amid the more challenging operating environment.
The COVID-19 pandemic has hit Genting and GenM harder than initially expected. We do not envisage either of them to restore their credit metrics to levels that are supportive of AAA ratings in the next two years. The negative outlook, meanwhile, reflects the continued high degree of uncertainty over the ultimate impact of COVID-19 and the pressure on the ratings if the impact of COVID-19 turns out to be more severe than expected.
The gaming sector has been severely hit by COVID-19, with movement restrictions and border controls by many countries to contain its spread. After a hiatus of more than three months, the resumption of its operations in Malaysia, Singapore, UK and US is a positive development. That said, we expect slow earnings recovery amid international borders that are still mainly closed as well as limited capacity and breadth of services.
The negative effects of the COVID-19-induced economic slowdown on consumer income and wealth will constrain discretionary spending on gaming and leisure activities. Concurrently, lingering fear of the coronavirus may affect travel plans and impede patronage. These repercussions are likely to persist even after the health crisis subsides and travel restrictions are relaxed.
We envisage severe revenue contraction for Genting (relative to 2019 levels) until at least 1H 2021. Its earnings are only likely to be restored to pre-crisis levels in 2022 at the earliest - against our initial expectation that they would mostly normalise by 2021. Although the Group has implemented cost optimisation measures, these are unlikely to fully mitigate the impact on its earnings. After the plunge in fiscal 2020, Genting’s operating profit before depreciation, interest and tax is envisaged to stay below pre-crisis levels in fiscal 2021 amid a tepid recovery in business volumes.
Before the outbreak of COVID-19, capital expenditure (capex) of Resorts World Las Vegas (RWLV) and Resorts World Genting as well as the acquisitions of a 49% stake in Empire Resorts, Inc had led to a negative pre-financing cashflow in fiscal 2019 – Genting’s first deficit in over five years. The hefty capex, combined with sustained dividends, had turned its net cash position to RM2.4 bil of net debt as at end-December 2019.
Genting’s capex needs are projected to exceed RM9 bil in fiscal 2020 (fiscal 2019: RM8.8 bil), as the construction of RWLV peaks this year. This, coupled with weaker cashflow generation amid the pandemic, is expected to result in a spike in its net debt balance in 2020. Genting’s net gearing ratio is projected to deteriorate to around 0.35 times as at end-December 2022 (end-December 2019: 0.06 times). Although the Group’s funds from operations (FFO) net debt cover is anticipated to rebound to 0.20 times in fiscal 2021 and 0.35 times in fiscal 2022 (fiscal 2019: 1.85 times), its credit metrics are no longer consistent with its previous AAA ratings.
Similar to its parent, GenM’s credit metrics are also expected to weaken materially in the next two years. Its net gearing ratio is projected to deteriorate to 0.55 times by end-December 2022 (end-December 2019: 0.30 times) while its FFO net debt cover is slated to come in at only 0.30 times in fiscal 2022 (fiscal 2019: 0.45 times). GenM’s ratings are aligned with those of its parent based on their close relationship.
On a brighter note, Genting had entered this challenging period with superior liquidity, with RM32.7 bil of cash and cash equivalents against RM3.5 bil of short-term debts as at end-June 2020.
Meanwhile, in relation to Genting Hong Kong Limited’s (Genting HK) recent debt restructuring exercise, we understand that there are no cross-default provisions, guarantees or keepwell structures in Genting HK’s borrowings that may affect Genting. Nevertheless, the event could result in some negative perception of Genting among investors.
There may be negative pressure on Genting’s ratings (and, indirectly, those of GenM) if the severity of COVID-19 repercussions extends beyond our current expectations and derails the anticipated improvement in the Group’s performance in 2022. Rating pressure may also stem from unexpected sizeable capex and investments. The rating outlook may be revised to stable if the recovery in Genting’s operating performance matches or exceeds our expectations, and once there is more clarity on the duration and severity of the coronavirus crisis.
Corporate credit ratings
RM2.0 bil MTN Programme (2012/2032)
(Issued by Genting Capital Berhad)
RM10 bil MTN Programme
(Issued by Genting RMTN Berhad)
Genting Malaysia Berhad
Corporate credit ratings - National scale
RM5 bil MTN Programme (2015/2035)
(Issued by GENM Capital Berhad)
RM3 bil MTN Programme (2018/2038)
(1) The debt programmes under Genting Capital Berhad and Genting RMTN Berhad are backed by full, unconditional and irrevocable corporate guarantees from Genting.
(2) The debt programmes under GENM Capital Berhad are backed by full, unconditional and irrevocable corporate guarantees from GenM.
(3) The rating of the RM1.6 bil MTN Programme issued by GB Services Berhad had been withdrawn after it was cancelled in November 2019. The programme was last rated at AAA(s)/Stable.
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Similarly, the disclaimers above also apply to RAM Ratings’ credit-related analyses and commentaries, where relevant.
Published by RAM Rating Services Berhad
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Rating Rationale: Genting Berhad
Rating Rationale: Genting Malaysia Berhad
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