RPT-Fitch affirms Australia's Crown at 'BBB'; outlook stable
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Oct 4 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed Australia-based gaming and entertainment operator Crown Limited's (Crown) Long-term Issuer Default Rating (IDR) and its senior unsecured rating at 'BBB'. The Outlook on the IDR is Stable.
Crown's assets in Melbourne and Perth continue to deliver solid and relatively defensive earnings. However, these assets are the main cash flow generators and they present concentration risks. Crown's 33.7% interest in Macau's Melco Crown Entertainment Limited (Melco Crown) is a growth opportunity, and future dividend flows from Melco Crown will bring some diversification.
KEY RATING DRIVERS
Defensive Australian Casinos: Crown's two established casinos - Crown Melbourne in Victoria and Crown Perth, Western Australia - have a long history of stable cash generation, and have remained resilient during economic downturns. This in part reflects the significant contribution from stable and predictable local markets and has been helped by the substantial expansion and upgrade (capex of AUD1.8bn over FY09-FY13) across both properties. Crown's main floor gaming (MFG) offering represents over 50% of revenue. Over the period FY09-FY13, MFG at Melbourne and Perth have grown at an average of 4.0% and 5.0% respectively. The stable cash generation also reflects Crown's position as the sole licensed casino operator in the respective regions.
Lack of Business Diversification: Crown has limited business diversification, with the Australian assets being the main cash flow contributors. Future dividend flows from Melco Crown will bring some diversification.
Continued Investment in Australia: Capex is expected to remain sizeable over the next three years, totalling around AUD890m. The spending is largely for construction of the new Crown Towers Perth, and remaining planned expansion and maintenance capex across both Melbourne and Perth. This is less than that the AUD1.1bn in the previous three years due to completion of upgrades at Crown Melbourne.
Despite this ongoing capex, Fitch expects adjusted debt to operating EBITDAR to reduce to about 1.5x by the end- FY15 (end-FY13: 2.2x) reflecting strong cash generation. This metric, however, does not include capex for Crown Sydney. Crown is working with the New South Wales government as part of stage 3 of the unsolicited proposal process, but the size and timing of project cash flows, together with funding structure, have not been disclosed.
Exposure to Largest Gaming Market: Macau is the largest gaming market and gaming revenues have been strong (14% growth for 2013 in Fitch's Macau base case gaming revenue outlook). We have a favourable outlook for mass-market revenue over the medium term stemming from the higher margins in this segment. This segment is also less reliant on macro credit policies and will benefit from infrastructure improvements. Melco Crown derives roughly two-thirds of its property level EBITDA from the mass-market segment, which also demonstrates more consistent EBITDA margin. Macau presents a growth opportunity and diversity for Crown and is therefore considered a pillar to Crown's rating.
No positive rating action is anticipated over the next 24 months as the company completes major projects and in the absence of greater clarity on the investment in Crown Sydney. Notwithstanding this, should net adjusted debt (excluding working capital cash) to EBITDAR fall to below 1.75x (FY13: 2.1x) on a sustained basis, this could lead to an upwardly revised rating or Outlook.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Net adjusted debt (excluding working capital cash) to EBITDAR exceeding 2.5x on a sustained basis as a result of cost overruns or project delays.
- Significant regulatory action or additional material funding of investments that could increase leverage.
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