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June 18 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed Malaysia-based gaming conglomerate Genting Berhad’s (Genting) Long-Term Foreign Currency Issuer Default Rating (IDR) and senior unsecured rating at ‘A-'.
Fitch has also affirmed Genting’s 52%-owned subsidiary, Genting Singapore PLC’s (GENS) Long Term Foreign and Local Currency IDRs at ‘A-’ and its SGD perpetual capital securities at ‘BBB’. The Outlooks for Genting and GENS are Stable. Genting’s ratings reflect its continued strong market position in the Malaysian and Singaporean
gaming markets, its robust though lower operating margins, and low net financial leverage. The ratings also benefit from the company’s modest diversification via its plantation and power businesses.
GENS’s ratings are equalised with Genting’s due to strong strategic and operational ties between the two entities, with GENS contributing about 48% of Genting’s consolidated EBITDA in 2012. Genting’s revenue momentum and EBITDA weakened in 2012 primarily due to lower business volume in Singapore, lower win percentage in Malaysia and lower crude palm oil (CPO) prices. However, as visitor arrivals continue to support the GENS mass market segment, and with an expectation that win rates will normalize, Fitch expects Genting’s EBITDA margin to be sustained at over 35%.
Weak Q113 performance: Genting’s EBITDAR margin declined to 37% in Q113 from 48% in Q112 (FY12: 41%) and its financial leverage (gross adjusted debt/operating EBITDAR) deteriorated to 2.51x as of 31 March 2013 from 2.41x in FY12. The weaker financial performance was on account of lower win rates reported by GENS and Genting UK and lower palm oil prices. With the completion of the resort (and absence of pre-opening expenses) and hold rates stabilizing over time, Fitch expects GENS’ EBITDAR margin to stabilize at around 40%.
Limited impact from Las Vegas acquisition: Fitch does not expect this project to impair Genting’s credit profile. This assumes around 50% of the project is funded through debt and the facility commences full-scale commercial operations by 2017. In March 2013, Genting acquired Boyd Corp’s unfinished Echelon project at Las Vegas for USD350m (approx. MYR1.09bn). Genting proposes to build an integrated gaming resort at this site, the first phase of which Fitch estimates will cost USD2.5bn to USD3bn and will take around three years to complete. This project in isolation does not materially negatively impact Genting’s credit profile. However, with possible new jurisdictions, and in particular locations like Japan, and noting that Genting has land in Miami and has been monitoring the potential legalization of gaming in Florida, any execution of such large scale projects concurrently has the potential to stretch Genting’s credit profile.
High minority-adjusted gross leverage: Genting’s financial leverage on a consolidated basis is not directly comparable with that of its peers given a high level of minority interests in almost all its key operating subsidiaries.
However, even after adjusting for this - by deducting minority interests as operating EBITDAR - Genting’s financial leverage as measured by the ratio of gross adjusted debt to operating EBITDAR less minority interest was high at 3.18x in FY12 (FY11: 2.58x). Whilst this in isolation is high relative to Genting’s rating, Fitch takes comfort that the company maintains strong cash balances.
Ample financial flexibility: The financial risk arising from Genting’s high financial leverage is mitigated by its ample cash balance of MYR19.8bn as of 31 March 2013 (31 December 2012: MYR21.7bn). Genting’s net financial leverage as measured by the ratio of net adjusted debt to operating EBITDAR less minority interest was at negative 0.67x in FY12 (FY11: 0.17x) i.e. Genting is in a net cash position.
Holdco debt structure acceptable : While the holding company is debt-free, it had guaranteed MYR4.5bn subsidiary debt as of 31 December 2012 (31 December 2011: MYR2.5bn). The holding company earns a stable and recurring stream of revenues in the form of license and management fees from subsidiaries and dividends from its subsidiaries, which is adequate to meet financial obligations should the guarantees be invoked. As the holding company has management control of operating subsidiaries, structural subordination risk is acceptable.
Negative: Future developments that may, individually or collectively, lead to negative rating action on Genting’s ratings include
-Failure to moderate financial leverage as measured by the ratio of gross adjusted debt to operating EBITDAR less minority interest to less than 2.5x and to maintain strong cash balance, and
-Net financial leverage as measured by the ratio of net adjusted debt to operating EBITDAR less minority interest being sustained at less than 1.0x Upside potential to the ratings is limited by the capital intensity of the gaming business.
-Any weakening of operational and strategic ties between GENS and Genting will also result in GENS’s rating being notched down from its parent’s rating. Fitch assesses GENS’s standalone rating at ‘BBB’ - despite its operational and financial metrics being in line with Genting’s consolidated numbers - primarily due to its single-market exposure.