Studio City Finance Limited — Moody’s assigns Ba3 to Studio City’s proposed senior secured notes
Rating Action: Moody’s assigns Ba3 to Studio City’s proposed senior secured notesGlobal Credit Research – 08 Feb 2022Hong Kong, February 08, 2022 — Moody’s Investors Service has assigned a Ba3 rating to the USD senior secured bonds to be issued by Studio City Company Limited, which is wholly owned by Studio City Finance Limited (Studio City) (B1 negative) through Studio City Investments Limited.The bonds will be guaranteed by Studio City Investments Limited and all of its existing subsidiaries (other than Studio City Company Limited).The rating outlook is negative.The proceeds from the proposed bond issuance, together with new equity issuance, will be used to fund the Studio City phase two project and for general corporate purposes.RATINGS RATIONALE”The proposed bonds and equity issuance will significantly strengthen Studio City’s liquidity profile and help it contain a deterioration in its capital structure caused by weak cash flow and capital spending for its phase two project,” says Gloria Tsuen, a Vice President and Senior Credit Officer.”Nonetheless, we expect the company’s financial leverage will remain very weak at least through 2022. There are also lingering uncertainties around the recovery of the gaming market and the extension of existing gaming licenses. These factors drive the negative outlook.”The Ba3 rating on the proposed USD bonds is one notch higher than Studio City’s B1 corporate family rating (CFR), because the bonds benefit from the first lien on the company’s major assets, including the property on which the Studio City project is based, and shares in subsidiaries. This structure means that the bonds rank ahead of other unsecured claims and indebtedness.Studio City’s B1 CFR reflects the company’s moderate standalone credit quality and a one-notch uplift stemming from a likelihood of extraordinary support from its parent, Melco Resorts & Entertainment Limited (MRE), given the company’s strategic importance to the parent.Studio City’s standalone credit quality considers its established market position and its mass-market-focused operations. These strengths are counterbalanced by the company’s geographic concentration in Macao SAR, China (Aa3 stable).The standalone credit profile is also constrained by the company’s depressed earnings and cash flow amid the coronavirus pandemic. The weak operating cash flow and capital spending for the phase two project will lead to significant debt growth through 2022. Assuming that earnings will improve more substantially in 2023, Moody’s projects Studio City’s adjusted debt/EBITDA will rise to around 7.5x in 2023, compared with 4.1x in 2019. This projected leverage is at the weak end of the B1 rating category.Along with the proposed notes issuance, Studio City International Holdings Limited plans to raise approximately $300 million in new equity. It announced that its existing shareholders, which hold in aggregate over 99% of the outstanding shares, have subscribed to the offering.The proposed notes issuance and equity offering will significantly improve Studio City’s liquidity, which will become sufficient to cover the company’s ongoing cash burn and phase two expansion capital spending. The company has no material debt maturities until 2025.The CFR also reflects regulatory uncertainties over the extension of existing licenses, which will expire in June 2022. If tighter regulations are imposed on gaming concessionaires, it could have a material impact on Studio City’s operations.In terms of environmental, social and governance (ESG) considerations, the ratings factor in the company’s high ownership concentration by MRE and ultimately by a controlling shareholder. These risks are mitigated by the likelihood of support from the parent company and the recent track record of significant equity financing.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGMoody’s could return Studio City’s outlook to stable if the company improves its earnings and maintains a balanced financial policy, such that its debt/EBITDA falls below 7.5x-8.0x and EBITDA/interest exceeds 1.8x on a sustained basis.On the other hand, Moody’s could downgrade Studio City’s ratings if (1) the company’s operations are unlikely to recover sufficiently; or (2) its debt-funded capital spending exceeds expectations, resulting in strained liquidity or high leverage on a sustained basis. Specifically, downward rating pressure will likely emerge if its debt/EBITDA exceeds 7.5x-8.0x and EBITDA/interest remains below 1.8x on a sustained basis.The principal methodology used in this rating was Gaming published in June 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1276316. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.Studio City Finance Limited, through its subsidiaries, develops and operates the Studio City property, an integrated gaming and entertainment resort in Macao. The company’s holding company, Studio City International Holdings Limited, is listed on the New York Stock Exchange and is around 55% owned by Melco Resorts & Entertainment Limited.REGULATORY DISCLOSURESFor further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. 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