KUALA LUMPUR (Oct 14): Fitch Ratings has upgraded the Issuer Default Rating (IDR) of Genting Malaysia Bhd's (GenM) unit Empire Resorts, Inc to "B+(EXP)" from "B(EXP)".
It has also assigned a "BB+(EXP)"/"RR1" rating to Empire's announced senior secured notes. The rating outlook is revised to Stable from Negative.
According to Fitch, the one-notch upgrade reflects an improved stand-alone credit profile pro forma for the announced recapitalisation.
It said Empire's stand-alone "B-" IDR is supported by improved financial flexibility and modestly positive forecast FCF generation, offset by its geographic concentration and high leverage.
"The two-notch uplift reflects the moderate linkage to Genting Malaysia (GenM, BBB/Negative). The revision of the outlook to Stable reflects the property's recent healthy operating performance and regional gaming's broader solid recovery," it said.
To note, Empire announced a recapitalisation that includes an expected US$300 million of senior secured notes, a new US$75 million holding company (HoldCo) loan, and a US$150 million preferred equity investment by GenM.
Meanwhile, Fitch forecasts Empire's stand-alone gross rent-adjusted leverage to approach six times by 2022 driven by a more conservative proposed capital structure and a strong recovery in US regional gaming from the coronavirus disruption.
"The credit profile should continue to modestly de-lever through 2024 as free cash flow (FCF) generation can support a small level of debt paydown at the HoldCo level," it said.
It also noted its earnings before interest, taxes, depreciation and amortisation, and restructuring or rent costs margins have improved sequentially since early 2021, supported by management's privatisation cost saving measures, increased win-per-unit-per-day, and regional gaming's strong recovery.
Fitch also said, Empire's proposed note issuance and preferred equity investment will eliminate its near-term refinancing risk and fund two debt service reserve accounts.
"In addition, FCF generation will turn positive in 2022 and provide some additional financial flexibility in the context of Empire's 'B-' stand-alone credit profile," it said.
It also said Empire has low maintenance capex needs given the property's age and development capex related to the Orange County (OC) slots-only property will not impact Empire's liquidity profile as it will be primarily funded from outside the restricted group.
Fitch expects FCF to be allocated towards HoldCo debt repayment and increasing liquidity.
Meanwhile, Fitch said Empire operates a single property, Resorts World Catskills (RWC), in a competitive market that could be subject to new supply in the medium term.
According to the rating agency, single-site casino operators are typically rated on the low end of speculative grade, though some can achieve higher ratings if they are in well-protected, monopolistic type regulatory environments and have very low leverage.
"Empire could become more diversified with its second slots-only casino licence slated for the nearby Orange County, NY (OC, to open in 2022). However, given the geographic proximity of OC the rating's benefit from opening the additional casino will be somewhat limited," it said.
It also noted RWC is located approximately 90 miles from New York City, and the immediate area around the casino is remote relative to the size of resort.
According to Fitch, RWC competes with Atlantic City, NJ, eastern Pennsylvania, New York City area slots-only properties and Connecticut tribal casinos for New York metro area customers.
"The competitive landscape makes significant, long-term growth in gaming revenues unlikely. Additionally, New York State can consider incremental downstate full-scale licences beginning 2023, which could, in turn, increase political momentum to try and expand gaming in New Jersey again," said Fitch.
Fitch views Empire's association with GenM (BBB/Negative) positively and believes it warrants a two-notch uplift from the "B-" stand-alone credit profile under Fitch's "Parent and Subsidiary Rating Linkage" criteria.
"The bottoms-up approach focusing on the stand-alone credit profile differs from other Genting-owned entities that are equalised with the parent's rating.
"This is primarily due to Genting not wholly-owning Empire Resorts, as Kien Huat (the investment vehicle of the Lim family that controls Genting) owns 51% and controls Empire. In addition, Fitch views RWC as having less strategic value than other wholly-owned Genting properties, which are generally large-scale flagship assets that generate materially greater cash flow," it said.
Still, it said, RWC does have strategic value given Genting's reputational risk with global gaming regulators, and the property is managed by the same team as Resorts World New York and shares the same brand.
"The two-notch uplift is also reinforced by demonstrated financial support from both Kien Huat and Genting, mainly through preferred equity investments, to ensure the prior capital structure's debt was serviced during initial operating weakness and to recapitalise the entity at a more conservative level than previously contemplated," it said.