S&P affirms Genting's BBB rating with negative outlook on slower recovery seen

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The slower recovery is due to continued travelling restrictions and Genting Singapore’s reliance on overseas travellers, which make up an estimated 75% to 80% of Resorts World Sentosa's (RWS) demand.

KUALA LUMPUR (Sept 28): S&P Global Ratings has affirmed its long-term issuer credit rating of Genting Bhd at "BBB" and Resorts World Las Vegas (RWLV) at "BBB-", with a negative outlook, with the rating agency expecting a slower recovery of key credit metrics for Genting.

The negative outlook takes into account S&P's expectations that Genting’s debt-to-earnings before interest, taxes, depreciation and amortisation (Ebitda) ratio will breach its downgrade trigger over the next 12 to 24 months, driven by a slow recovery in the Singapore market.

The slower recovery is due to continued travelling restrictions and Genting Singapore’s reliance on overseas travellers, which make up an estimated 75% to 80% of Resorts World Sentosa's (RWS) demand.

But S&P expects a quicker recovery for other properties, including in Malaysia, the UK and US, where domestic demand dominates.

“For Malaysia specifically, we forecast leisure and hospitality Ebitda in 2021 to reach 55% to 60% of 2019's level, before exceeding that in 2022; the recovery will be spurred by resilient local demand, which we estimate at about 75% of the revenue mix, and stronger volume from VIPs given that they cannot fly out of Malaysia to play,” S&P said in a note today.

Genting’s Ebitda is expected to recover in 2021 to between 50% and 55% of 2019's level, and to 90% to 95% in 2022, versus the rating agency’s previous expectation of 75% to 80% in 2021, and 100% to 105% in 2022.

It projects the group’s debt-to-Ebitda ratio to reach five to 5.2 times in 2021 before falling to 2.6 to 2.8 times in 2022. However, it said the current rating level does not have any tolerance for a weaker recovery scenario.

“In our view, further upside to Genting Singapore's recovery from our base case is possible on stronger local demand or a faster return of overseas travellers.

“With a lack of options for Singapore residents to travel abroad and recent government efforts to promote local tourism, Singapore's local market size could exceed 2019's level, compared with our current base case of a 100% recovery by 2021,” said S&P.

It added that the Singaporean government recognises that the overseas tourism industry is important to the economy and hopes to ease travel restrictions.

Easing of travel restrictions with China could help to spur demand recovery, S&P said, given that Greater China made up about 24% of international visitor arrivals in 2019.

Meanwhile, the rating agency said RWLV will continue to be a meaningful earnings contributor to Genting from 2022. RWLV remains on track to open in the summer of 2021.

“Besides launching as the first new property in Las Vegas in a decade, it is located next to the convention centre connected by a proposed tunnel. Allegiant Stadium, home to the National Football League's Las Vegas Raiders and the venue of the annual Las Vegas Bowl, was opened in July 2020 and could help attract visitors back to Las Vegas.

“That said, in a post-Covid-19 world, there could be structural changes to the way businesses operate, and the convention business of Las Vegas could shrink as a result. We estimate RWLV to make up 10%-15% of Genting's Ebitda in 2022,” said S&P.

Potential conflicts of interest due to broader ownership linkage of Lim family

On the founding family’s controlling stake in Genting, the rating agency said the broader ownership linkage of the Lim family could create potential conflicts of interests, given that the Lim family also had board representation in multiple Genting entities.

For example, S&P said, Genting has maintained its interim dividend at 2019's level despite its casinos being closed due to Covid-19 in its key operating countries.

In contrast, its gaming peers such as Las Vegas Sands, Crown Resorts and SkyCity Entertainment have suspended dividend programmes to preserve cash and management leverage ratios.

“As a result, we assess Genting’s management and governance profile as fair — from satisfactory previously. This has further reduced the headroom in Genting’s current rating level,” said S&P.

The rating agency said it may lower its rating of Genting if it expects the group’s debt-to-Ebitda ratio to remain above three times, or its FFO-to-debt ratio at below 30%, for a prolonged period.

This could happen if Genting’s market position deteriorates, the recovery in visitor arrivals takes longer than expected, RWLV is delayed or its take-off after opening is slower than initially expected, or if Genting pursues aggressive capex or acquisitions.

“We will lower our rating of RWLV if we downgrade Genting. We could also lower our rating of RWLV if we detect signs that the company's importance to its parent is reducing, translating into diminished support for construction-related issues, or weakening market conditions,” the rating agency added.

Tan Choe Choe