Fitch Ratings has revised the Outlooks on the Long-Term Issuer Default Ratings (IDRs) of Genting Berhad (GENT) and its wholly owned subsidiaries, Genting Overseas Holdings Limited (GOHL) and Resorts World Las Vegas LLC (RWLV), to Stable from Negative.
Fitch has also affirmed the IDRs of GENT and GOHL at 'BBB', and RWLV at 'BBB-'. The rating on USD1.5 billion senior unsecured notes due 2027, which are guaranteed by GOHL, has been affirmed at 'BBB', while the ratings on RWLV's USD1.35 billion senior unsecured notes due in 2029 and 2031 and its senior secured credit facilities have been affirmed at 'BBB-'.
GOHL's IDR is equalised with GENT's, while RWLV is rated one notch lower. The Stable Outlooks are driven by the gaming sector's robust revenue recovery, which is evident in GENT's 2Q22 results, especially in Malaysia and the US, following receding Covid-19 risks and the easing of preventive restrictions. We believe GENT's proportionately consolidated net leverage ratio is on track to fall below 3.5x by 2023, which is consistent with its rating.
GENT's credit profile is supported by its position as the sole casino-licence holder in Malaysia, where it benefits from a high share of domestic visitors, and a healthy share in Singapore's duopolistic market. The rating also incorporates GENT's robust diversification in terms of gaming assets in the US and the UK, and cash flows from non-gaming businesses such as palm oil and energy.
Fitch has also affirmed GENT's senior unsecured debt rating at 'BBB' and simultaneously withdrawn the rating because GENT is no longer issuing senior unsecured debt and there is no Fitch-rated debt issued or guaranteed by GENT.
Key Rating Drivers
Robust Recovery in Malaysia: We expect revenue from Malaysia, which formed almost 35% of GENT's pre-pandemic consolidated total, to recover to over 75% of the 2019 level in 2022 and around 95% in 2023 (1H22: 31% of full-year 2019 revenue) following the lifting of pandemic-related restrictions since April 2022. The robust recovery should be aided by limited reliance on foreign visitors and additions to the new Genting SkyWorlds theme park by 4Q22.
GENT's EBITDAR margin has benefitted from a sharp cut in the workforce in Malaysia to mitigate the impact of Covid-19, and we expect margins in 2022 and thereafter for the Malaysian operations to remain higher than in 2019. Our margin expectation factors in the impact of wage inflation and spending on marketing and promotional activities to drive revenue growth.
Slower Recovery in Singapore: We expect revenue from Singapore to remain 35% below the 2019 level in 2022 and 10% lower in 2023, before reaching the same level in 2024. Singapore contributed around 35% of GENT's pre-pandemic consolidated revenue. Singapore reopened its international borders to fully vaccinated travellers from 1 April 2022. However, arrivals in the country remained well below 2019 levels in 2Q22 and subsidiary Genting Singapore Limited's (GENS) 2Q22 annualised revenue was around 55% of the 2019 level.
GENS said limited international flight capacity and pricey airfares dampened tourist inflows. We expect visitor numbers to improve gradually over the next two years. However, we think the EBITDAR margin is unlikely to recover to the pre-pandemic level in the next three years due to the increase in the gaming tax from 2Q22.
Las Vegas Ramps Up: RWLV's Las Vegas integrated resort benefits from being the first new property in the area in over a decade, although it also faces competition in a mature market. We expect a gradual ramp-up towards Fitch's estimated EBITDAR of USD350 million by 2025, delayed by around nine months from our previous expectation due to Covid-19 following the opening of the resort in June 2021. We think robust visitor inflow into Las Vegas will boost revenue and EBITDAR over the next two years, with RWLV hotel occupancy at almost 90% in 2Q22.
Falling Leverage: We calculate GENT's adjusted net debt/EBITDAR leverage based on the proportionate consolidation of its three listed subsidiaries - Genting Malaysia Berhad (GENM, BBB/Stable), GENS and Genting Plantations Berhad (GENP) - and associate Genting Empire Resorts LLC (GERL). We estimate leverage will decline to 3.2x by 2023 (2022F: 4.0x) and below 3.0x from 2024.
Improving FCF: GENT's free cash flow (FCF) profile should benefit from significantly lower capex compared with the last three years in addition to higher EBITDAR. We forecast reduced spending in Malaysia and the US, following the opening of Genting SkyWorlds in February 2022 and RWLV. However, capex in Singapore will increase gradually for the SGD4.5 billion resort expansion programme.
Potential Casino Licences: Three downstate New York full-scale casino licences are likely to be awarded by 1H23. We think GENM's subsidiary, Genting New York LLC (GENNY, BBB-/Stable), which offers slot-like gaming in New York City, may bid for a licence, although it will face strong competition from other operators. GENM is also competing with the incumbents in its bid for a licence in Macao, where six concessions are due for renewal by end-2022. We have not factored the impact from potential licence wins in our estimates due to significant uncertainties.
GOHL's Rating Equalised: We equalise GOHL's IDR with that of GENT as we consider it a funding vehicle for the group. GOHL issued USD1.5 billion of guaranteed senior unsecured notes in 2017 through its wholly owned subsidiary, GOHL Capital Limited, and the proceeds were used mainly for equity infusion into RWLV.
RWLV Rated One-Notch Lower: GENT has 'High' strategic incentive to support weaker subsidiary RWLV due to the financial contribution and competitive advantage to GENT. We expect RWLV, which is one of GENT's three flagship assets, to contribute around 25% of GENT's proportionately consolidated EBITDAR from 2025. The 'Medium' operational incentive is driven by the sharing of the Resorts World brand and integrated management decision-making, despite limited operational synergies as GENT's casinos operate independently. The legal incentive is 'Low' as there are no guarantees and cross-default clauses.
Derivation Summary
GENT is rated two-notches higher than Las Vegas Sands Corp. (LVS, BB+/Rating Watch Negative), which owns and operates six casino resorts, including five in Macao and one in Singapore. GENT's higher rating is driven by its stronger business as well as financial profile. GENT's business profile is underpinned by its monopolistic position in the mature Malaysian gaming market along with a geographically diversified asset portfolio, and cash flows from non-gaming businesses.
LVS, however, is highly reliant on Macao, where recovery prospects have been affected by strict governmental Covid-19 policies and continued weak visitation. LVS's rating also faces risk from the renewal process for its concession, which expires by end-2022. GENT's stronger financial profile assessment is driven by its lower net leverage in 2022 and 2023, based on Fitch's estimates.
GENT is rated at the same level as Seminole Tribe of Florida (BBB/Stable), which has sizeable gaming operations in two distinct, populous Florida markets - Hollywood and Tampa - and owns a number of other smaller casinos across southern Florida. It benefits from exclusivity in Tampa and limited competition in south-east Florida. We think GENT's significantly better geographical and business diversification compensates for its weaker financial profile due to higher leverage.
The rating of The Morongo Band of Mission Indians (BBB-/Stable), which operates a casino in California, is lower than GENT's due to single-site risk and a smaller EBITDAR, despite a significantly better leverage profile.
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for GENT are:
Consolidated annual revenue jumps almost 70% in 2022 before rising by 16% in 2023 and 6% in 2024
Average annual EBITDAR margin of 33% over 2022-2024
Average annual capex of MYR3.7 billion over 2022-2024
Average annual dividend outflow of around MYR850 million over 2022-2024.
RATING SENSITIVITIES
GENT and GOHL
Factors that could, individually or collectively, lead to positive rating action/upgrade:
GENT's leverage in terms of adjusted net debt/EBITDAR, based on proportionate consolidation of its three subsidiaries - GENM, GENS and GENP - and associate GERL, is sustained below 2.5x.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Leverage is sustained above 3.5x from 2023 for an extended period.
RWLV
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Positive rating action on GENT
Perceived strengthening of operating or legal incentives for GENT to support RWLV.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Negative rating action on GENT
Perceived weakening in strategic or operating incentives for GENT to support RWLV.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Liquidity and Debt Structure
Robust Liquidity Position: GENT had consolidated cash and cash equivalents of around MYR23 billion as of end-2021, and over MYR21 billion as of end-June 2022. In comparison, consolidated debt maturities over 2022-2024 were significantly lower at around MYR11 billion as of end-2021. We also forecast positive FCF for the group over 2022-2024. If GENNY applies for and wins the licence for a full-scale casino in New York City, we expect the group to partly rely on new debt to finance the associated capex such that there is no material impact on its liquidity.
At the standalone level, GENT had cash of around MYR800 million as of end-2021 and does not have any debt. GENT, however, guaranteed MYR3.2 billion in debt as of end-2021, which consisted almost entirely of medium-term notes (MTNs); MYR500 million in the MTNs were repaid in 1H22 and the next major debt maturity is MYR1.5 billion of MTNs in 2027. We expect liquidity at the standalone level to remain healthy, supported by dividends from GENT's subsidiaries and fees from management and licensing services.
Issuer Profile
GENT is a Malaysia-based conglomerate with interests in gaming, leisure and hospitality, palm oil, power, and oil and gas spread across several countries. GOHL holds GENT's 52.7% interest in GENS, which owns and operates Resorts World Sentosa. RWLV owns and operates a USD4 billion integrated resort on the Las Vegas strip.
Summary of Financial Adjustments
Material financial adjustments to GENT's consolidated financial statements include:
GENT's reported revenue has been increased on account of other operating income (2021: MYR124 million) and grant income (2021: MYR99 million), and reduced for revenue recognised for sale of land by GENM (2021: MYR102 million).
GENT's reported operating cost, comprising cost of sales, selling and distribution costs, and administrative expenses, has been adjusted for pre-opening costs incurred (2021: MYR461 million), other operating expenses (2021: MYR321 million), R&D expenditure (2021: MYR89 million), and net reversal of impairment on trade receivables by GENS (2021: MYR112 million).
GENT's reported lease liabilities have not been included under adjusted debt. Instead, we have applied an 8x multiple to capitalise GENT's total lease expense (2021: MYR215 million), which is the sum of depreciation of right-of-use lease assets and interest on lease liabilities.
Corporate guarantees provided by certain subsidiaries in Indonesia to banks on plasma cooperatives' loan facilities (2021: MYR111 million) have been treated as off-balance-sheet debt.
We have treated a portion of cash that is reported as restricted as readily available (2021: MYR338 million) since it acts as security against certain borrowings but can be used for debt repayment.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Public Ratings with Credit Linkage to other ratings
Fitch equalises GOHL's IDR with that of its parent GENT, considering it a funding vehicle for the group. RWLV is rated one-notch below its stronger parent GENT, based on our assessment that GENT has 'High' strategic and 'Medium' operational incentives to provide support to RWLV.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
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