Gaming alert | Packer’s rising casino debt making bond market wary

James Packer

Australian billionaire James Packer’s casino empire borrowings are rising too fast for some bond investors’ comfort.
With Crown Resorts Ltd.’s debt pile swelling and profits down, the cost of insuring the gaming operator’s notes against non-payment climbed to the most expensive level in two years. The deterioration of the Melbourne-based company’s balance sheet could also pressure its credit ratings.
Crown’s net debt grew 47 percent to A$2.5 billion (USD1.8 billion) in the last financial year and it may borrow more to develop its attractions in Australia and a potential new casino in Las Vegas. At the same time earnings have dropped and its Macau joint venture is producing less cash as China’s corruption crackdown puts the brakes on high rollers. Packer has also changed his own role by stepping down as chairman last week.
“They’re sailing close to the wind with some of their credit metrics,” said Scott Rundell, chief credit strategist at Commonwealth Bank of Australia in Sydney. “We reckon the ratings agencies should place them on negative outlook, although that’s not to say they will.”
The yield premium over the swap rate on Crown’s November 2019 Australian dollar bonds widened to as much as 179 basis points this month, the most on record based on CBA prices.
Crown’s credit default swaps have risen 22 basis points this year to 159 basis points as of Aug. 14, the third-worst performance in the 25-member iTraxx Australia index, based on CMA prices. The contracts reached as high as 164 basis points on Aug. 13, the highest since August 2013.
The company is rated two steps above junk at both Moody’s Investors Service and Standard & Poor’s. Both have a stable outlook and said there was no immediate impact on their ratings from Crown’s latest earnings announcement. Moody’s did describe the results as “credit negative.”
Net income after adjusting for one-time items and an unusual rate of winnings was A$526 million in the 12 months ended June 30, down 18 percent from a year earlier, Crown said last week. The profit received from its stake in Macau-focused Melco Crown Entertainment Ltd. slumped 45 percent.
Leverage remains within the limits of the current rating at Moody’s “but represents a significant reduction in headroom and increases the risk of downward rating pressure in light of a number of major projects that Crown is undertaking,” Moody’s analyst Maurice O’Connell wrote in a report.
Crown plans to spend more than A$1.4 billion on its facilities in Sydney, Melbourne and Perth in the next three financial years, according to the latest earnings presentation. Its Alon casino project on the Las Vegas strip is in the design stage.
Crown’s Chief Financial Officer Kenneth Barton said last week the balance sheet is in “reasonably good shape” and that the company looks “to maintain metrics that are consistent with our current rating.” Expenditure over the coming few years “looks to be sort of well covered by operating cash flow,” he said on a conference call with analysts.
The company has previously taken steps to protect its ratings, according to Anthony Ip, a credit sector specialist at Citigroup Inc. He cited in particular a decision to issue subordinated notes, as well as the inclusion of provisions in Crown’s most recent unsecured bond for investors to receive a higher coupon should the credit score be lowered.
“I got some comfort from their earnings presentation in that they will try to structure the project funding so that it protects their credit rating,” he said.
The company had about A$197 million of cash as of June 30 and total outstanding debt of A$2.66 billion, regulatory filings show.
In addition to the pressure on Macau gaming revenues from the Chinese government’s anti-corruption drive, Melco Crown faces challenges relating to issues such as gaming table allocations and smoking bans. At home, Crown is being affected by the mining slump in Western Australia at its Perth venue.
“Crown’s credit profile is certainly under pressure and we see a few cracks around the edges,” said CBA’s Rundell. “It’s not terminal, but over the near term there are more headwinds than tailwinds.” Benjamin Purvis, Bloomberg