October 9, 2017 / 6:37 AM / in 15 days

Fitch Affirms Australia's Crown Resorts at 'BBB'; Outlook Stable

(The following statement was released by the rating agency) SYDNEY, October 09 (Fitch) Fitch Ratings has affirmed Australia-based gaming operator Crown Resorts Limited's Long-Term Foreign-Currency Issuer Default Rating (IDR) and senior unsecured rating at 'BBB'. The Outlook is Stable. The affirmation reflects Fitch's expectation that Crown's Australian properties will remain resilient to changes in the domestic and global macroeconomic environments over the medium to long term. This is despite the company's results for the financial year ending June-2017 (FY17) showing softness in the country's mass-gaming market. In addition, the improvement in Crown's financial profile following the sale of its stake in Melco Crown Entertainment (MCE) counterbalances higher geographic concentration after a change in its strategic direction and divestment of major international assets. KEY RATING DRIVERS Strong Australian Assets: We believe Crown's Melbourne and Perth-based properties, which contributed over 85% of its revenue for FY17, will remain resilient to changes in domestic and global macroeconomic environments over the medium- to longer-term, supporting our Stable Outlook. This is despite the company's FY17 results showing softness in mass-market demand at both properties and the actions of foreign authorities affecting Crown's VIP business. Crown's Melbourne and Perth-based properties have generated stable cash and EBITDA for the past decade, supported by predictable local markets and Crown's position as the sole licensed casino operator in each region. Conservative Capital Structure: We expect Crown's net leverage to peak at 1.7x in FY20, well within the guidelines for its rating. This is despite our forecast higher funding requirements as construction of Crown Sydney ramps up. Crown's financial profile improved after the sale of its stake in MCE, which generated around AUD3 billion, moving Crown into a net cash position. Part of the proceeds were used to pay down AUD320 million of debt, while AUD600 million was returned to shareholders via a special dividend and AUD500 million via a share buyback in FY17. We expect another AUD350 million to be returned via a buyback in FY18. Crown also retired its AUD300 million medium-term notes, which matured in July 2017. These actions have improved Crown's leverage to (0.1)x at FYE17, as measured by adjusted net debt/EBITDAR, from 2.5x at FYE15, which was prior to the sale of the first tranche of its MCE stake. Fitch continues to apply 50% equity credit to Crown's hybrid securities following its announcement to buy back its subordinated hybrid Notes I as we expect the securities to remain a permanent feature of its capital structure. The repayment is not likely to affect the securities' permanent nature, as it represents a resizing of Crown's capital structure to reflect business changes from its MCE sell down. Development Pipeline Manageable: Crown's development pipeline includes two projects spaced over the next five years - Crown Sydney and Queensbridge Tower in Melbourne. The pipeline is heavy relative to Crown's free cash flow generation; however, we believe funding is manageable, particularly with Crown's improved financial flexibility following the MCE sale and the ability to sequence development timing. DERIVATION SUMMARY Crown's rating reflects its strong financial profile and the strength of its Australian assets. The company's rating compares well with global peer, Las Vegas Sands Corporation (LVS; BBB-/Stable), whose rating benefits from its strong financial profile and high-quality assets in attractive regulatory regimes. LVS has better geographic diversification, with one of the industry's best global market exposures, but Crown benefits from its diversification across Australia in favourable regulatory regimes, which have more stable demand profiles and where Crown is the sole licensed casino operator. Further, LVS's ratings are constrained by potential for large-scale development in Japan and the 2022 expiration of its concession in Macau. We believe Crown's better financial profile and exposure to more stable and mature demand environments underscores the one-notch differential with LVS. KEY ASSUMPTIONS Fitch's key assumptions within the rating case for Crown include: - single-digit consolidated revenue growth - Australian property normalised EBITDA margin of 27%-29% from FY18 to FY21, excluding the effect of any variance from the theoretical win-rate - dividends of 60 cents per share in each year from FY18 to FY21 - capex of around AUD400 million in FY18, AUD800 million in FY19, AUD700 million in FY20 and AUD200 million in FY21 RATING SENSITIVITIES Positive: No positive rating action is anticipated over the next two years as the company completes its major projects. However, developments that may, individually or collectively, lead to positive rating action include: - free cash flow (cash flow from operations less capex and dividends) moving towards a positive position on a sustained basis; or - net adjusted debt (excluding working capital cash)/EBITDAR falling below 1.8x on a sustained basis. Negative: Developments that may, individually or collectively, lead to negative rating action include: - net adjusted debt (excluding working capital cash)/EBITDAR increasing to above 2.5x for a sustained period. LIQUIDITY Strong Liquidity: Crown reported a strong liquidity position at FYE17 of AUD2.1 billion, including AUD415 million in committed undrawn facilities and cash of AUD1.8 billion, of which AUD1.6 billion was readily available. This was sufficient to cover current liabilities of AUD1.1 billion. The company's cash position benefited from the sale of its stake in MCE. Crown continues to restructure its balance sheet to correspond with its Australia-focused strategy by reducing debt and returning some proceeds to shareholders via share buy-backs and special dividends. Contact: Primary Analyst Kelly Amato, CFA Director +61 2 8256 0348 Fitch Australia Pty Ltd Level 15, 77 King Street, Sydney NSW 2000 Secondary Analyst Leo Park Analyst +61 2 8256 0323 Committee Chairperson Vicky Melbourne Senior Director +61 2 8256 0325 Summary of Financial Statement Adjustments Leverage: Fitch excludes cash on the company's premises and cash held in bank accounts needed for day-to-day operations from cash to calculate net leverage. Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Corporate Rating Criteria (pub. 07 Aug 2017) here Non-Financial Corporates Hybrids Treatment and Notching Criteria (pub. 27 Apr 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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