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Fitch Affirms Crown at 'BBB'; off Rating Watch; Outlook Stable
October 14, 2016 / 7:26 AM / a year ago

Fitch Affirms Crown at 'BBB'; off Rating Watch; Outlook Stable

(The following statement was released by the rating agency) SINGAPORE/SYDNEY, October 14 (Fitch) Fitch Ratings has affirmed the Long-Term Issuer Default Rating (IDR) and senior unsecured rating of Australia-based integrated resort operator, Crown Resorts Limited (Crown), at 'BBB'. Simultaneously, all ratings have been removed from Rating Watch Negative and a Stable Outlook has been assigned to the Long-Term IDR. The affirmation of the ratings reflects a review of Crown's proposed demerger of some of its international investments and its revised dividend policy to 100% of net profit after tax. We believe the strength of Crown's Australian assets counterbalances the increased geographic concentration resulting from the proposed demerger. We expect Crown's credit metrics to be broadly in line with its rating. This follows Crown's debt repayment from the AUD1.1bn in proceeds it realised from selling down of its shares in Melco Crown Entertainment Limited (MCE) from 34.3% to 27.4% in May 2016. Moreover, we expect Crown to maintain its prudent capital management approach, such that net leverage, as measured by adjusted net debt/EBITDAR, remains below 2.5x (financial year ended-June 2016 (FY16): 1.3x) - noting that we expect leverage to peak above this level in the lead-up to the completion of Crown Sydney and Queensbridge Tower, then return to an acceptable threshold. KEY RATING DRIVERS Strong Australian Assets: Crown's Melbourne and Perth-based properties contributed nearly 90% of its revenue for the financial year ended-June 2016 (FY16). Both properties have a long history of stable cash generation, recording positive EBITDA growth in each of the previous 10 years. This reflects the significant contribution from stable and predictable local markets and Crown's position as the sole licensed casino operator in each region. We believe these properties will remain resilient to changes in domestic and global macroeconomic environments, supporting the Stable Outlook. Development Pipeline Manageable: Crown's development pipeline following the proposed demerger will include three projects spaced over the next six years; Crown Sydney, Crown Towers Perth (which is nearing completion) and Queensbridge Tower. The proposed demerger significantly de-risks Crown's exposure to funding requirements associated with its Alon Las Vegas project, which will move into the proposed Crown International portfolio. Fitch expects Crown's net leverage to peak at around 3.0x in FY20, with Crown Sydney largely complete and Queensbridge Tower fully funded, but no cash flow generated from either project, and thereafter return to below 2.5x. Fitch notes that Crown's development pipeline is heavy relative to its free cash flow generation. However, we believe the funding is manageable and Crown has flexibility to sequence the timing of the development. Importantly, Crown is experienced at managing such large developments, spending around AUD3.5bn between FY08-FY16 on its Australian assets, which have enhanced the properties' growth and returns. REIT IPO and Minorities: Crown is considering an initial public offering of some of its Australian hotels in a Crown-controlled property trust. The creation of the trust would lead to a permanent cash-leakage to minority interests; however, Fitch believes this can be accommodated within its current net leverage thresholds. Crown's ability to manage its capital structure within the 2.5x leverage threshold on a sustained basis, above which Fitch would consider negative rating action, will reflect how the REIT sell-down proceeds are applied to debt reduction and other capital management initiatives Crown may undertake to ensure it meets its prudent capital management approach. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - consolidated revenue growing by single digits - an estimated Australian property normalised EBITDA margin, adjusted to exclude the effect of any variance from the theoretical win-rate, of 28%-29% through the forecast horizon - 100% dividend payout ratio 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) to move towards a positive position -net-adjusted debt (excluding working capital cash) to EBITDAR falling below 1.75x Negative: Future developments that may, individually or collectively, lead to negative rating action include: -net-adjusted debt (excluding working capital cash) to EBITDAR increasing above 2.5x on a sustained basis. SUMMARY OF FINANCIAL STATEMENTS ADJUSTMENTS Leverage: Fitch excludes cash on the company's premises and cash held in bank accounts needed to run the business's day-to-day operations from cash to calculate net leverage. Contact: Primary Analyst Nandini Vijayaraghavan, CFA Director +65 6796 7216 Fitch Ratings Singapore Pte Ltd 6 Temasek Boulevard #35-05 Suntec Tower Four Singapore 038986 Secondary Analyst Kelly Amato, CFA Associate Director +61 2 8256 0348 Committee Chairperson Kalai Pillay Senior Director +65 6796 7221 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: Additional information is available on Applicable Criteria Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1013116 Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. 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