Fitch Rates Wynn Macau's $500MM Sr Notes 'BB'; Affirms Wynn's IDRs at 'BB'
Fitch Ratings has assigned a 'BB' rating to Wynn Macau, Ltd.'s announced issuance of $500 million senior unsecured notes due 2021 and a 'BB' Issuer Default Rating (IDR) to Wynn Macau, Ltd.
Fitch also affirms the 'BB' IDRs of Wynn Las Vegas LLC (Wynn Las Vegas), Wynn Resorts (Macau), S.A. (Wynn Macau S.A.), and Wynn Resorts, Ltd (Wynn Resorts; collectively Wynn). Fitch affirms Wynn Macau S.A.'s senior secured credit facility at 'BBB-'. At Wynn Las Vegas, Fitch affirms the first mortgage notes (FMNs) at 'BB+' and the senior unsecured notes at 'BB'.
The notes will mature in October 2021, about eight months before Wynn's Macau concession is due to expire in June 2022. The notes will be used for general corporate purposes and will not have meaningful restrictive covenants.
The 'BB' rating on the Wynn Macau, Ltd notes is on par with the 'BB' IDR and two notches below the 'BBB-' rating on the Wynn Macau S.A. $2.3 billion credit facility. Fitch believes that the senior notes would be fully covered in an event of default at Wynn Macau, Ltd given the equity value (about $19 billion market capitalization), but does not notch the notes from the IDR. This is because the notes are subordinated to the Wynn Macau S.A. credit facility in terms of organizational structure and collateral.
There will also be no debt incurrence covenants at Wynn Macau, Ltd level, which would allow Wynn Macau, Ltd to incur additional debt in the future and dilute the recovery prospects for the noteholders. Wynn may choose to issue additional debt out of Wynn Macau, Ltd to possibly fund its U.S. project pipeline, pay any settlements potentially arising from the Okada dispute and/or ramp up shareholder-friendly activity at the Wynn Resorts and Wynn Macau, Ltd.
Fitch views the proposed transaction as neutral to slightly positive with respect to Wynn's IDRs, as it improves Wynn's overall liquidity at the expense of a near-term increase in leverage. The issuance increases consolidated gross leverage by about 0.4x to 4.7x from 4.3x for the LTM period ending June 30, 2013. When calculating leverage for Wynn, Fitch subtracts income attributable to minority interests from EBITDA and subtracts $222 million of the 2017 Las Vegas FMNs remaining after Wynn made a redemption offer earlier this year. These notes will be fully redeemed later this year when they become callable with restricted cash.
The increase in leverage is offset by improved liquidity. The increased liquidity at Wynn Macau, Ltd provides Wynn added flexibility in funding its $4 billion Cotai project while maintaining its $400 million per year dividends out of Wynn Resorts and potentially addressing requirements to fund additional development if Wynn receives a license in Massachusetts and/or Pennsylvania.
Wynn Macau, Ltd available liquidity pro forma for issuance of the notes is approximately $3.1 billion as of June 30, 2013. This includes $1.55 billion available on the revolver at Wynn Macau, S.A. and roughly $1.1 billion in available cash (net of cage cash, estimated by Fitch at $150 million). Wynn Macau, S.A.'s credit facility also has a $200 million accordion option.
Fitch's estimated run-rate discretionary free cash flow (FCF) for Wynn Macau, Ltd is approximately $900 million. This includes about $1 billion in EBITDA net of corporate expense and royalty fees and $100 million in combined interest expense and maintenance capex. Fitch released a detailed credit analysis report on Wynn on Sept. 4, 2013, which is available on www.fitchratings.com.
KEY RATING DRIVERS
The 'BB' IDR on Wynn, the parent and its subsidiaries reflects the financial strength of the Macau subsidiary (pro forma net debt near zero and $1.2 billion of property EBITDA), which offsets the weaker financial strength at the Las Vegas subsidiary (7x net leverage with $482 million of property EBITDA). Management's historically prudent balance sheet management and Wynn's strong brand value and high asset quality are also positively factored into the ratings.
Fitch links the IDRs of the parent and Wynn's operating subsidiaries. Linkage is supported by strong strategic linkage between the entities (i.e. common branding, management, cross-marketing, etc.) and a precedent of support to the weaker Las Vegas subsidiary. However, there are no structural or legal provisions, such as cross-defaults or guarantees, that support linking the ratings. Fitch analyzes Wynn mostly on a consolidated basis, but deducts earnings attributable to minority interest from EBITDA.
Fitch may upgrade Wynn's IDR to 'BB+' as consolidated gross leverage approaches 4x and net leverage declines below 4x following the ramp up of Wynn's $4 billion Cotai project, which is slated for early 2016 opening. An earlier upgrade is possible if Fitch gains a fair amount of comfort that the forecast leverage will be in line with these thresholds once the project ramps up.
There is cushion at the 'BB' IDR for a modest amount of operating declines, additional borrowing to support the Cotai project, other possible developments, and/or potential settlements related to the Okada dispute. However, should these or other pressures cause gross leverage to sustain above 5x (6.5x before Cotai ramps up), there could be pressure on the ratings.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'U.S. Leveraged Finance Spotlight - Wynn Resorts, Limited' (Sep. 4, 2013);
--'U.S. Gaming Recovery Analyses -- Second-Quarter 2013' (Aug. 21, 2013);
--'2012 Outlook: Gaming -- Return Generation in Full Swing' (Dec. 17, 2012);
--'Corporate Rating Methodology' (Aug. 5, 2013);
--'Parent and Subsidiary Rating Linkage' (Aug. 5, 2013);
--'Recovery Ratings and Notching Criteria for Non-financial Corporate Issuers' (Nov. 13, 2012).
Applicable Criteria and Related Research:
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers
Parent and Subsidiary Rating Linkage
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
2013 Outlook: U.S. Gaming (Return Generation in Full Swing)
U.S. Gaming Recovery Models -- Second-Quarter 2013
U.S. Leveraged Finance Spotlight -- Wynn Resorts, Ltd.
Michael Paladino, CFA, +1 212-908-9113
Fitch Ratings, Inc., One State Street Plaza, New York, NY 10004
Alex Bumazhny, CFA, +1 212-908-9179
Jamie Rizzo, CFA, +1 212-908-0548
Brian Bertsch, +1 212-908-0549