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Fitch Affirms Crown at 'BBB'; Outlook Stable on New Initiatives
December 16, 2016 / 6:24 AM / a year ago

Fitch Affirms Crown at 'BBB'; Outlook Stable on New Initiatives

(The following statement was released by the rating agency) SYDNEY, December 16 (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'. The Outlook on the IDR is Stable. This follows the company's announcements on 15 and 16 December 2016 that it has agreed to sell a further stake in Melco Crown Entertainment Limited (MCE) and decided not to proceed with the Alon project in Las Vegas or the demerger of its international assets, which it announced in June 2016. Crown said it has agreed to sell 198 million of its MCE shares to Melco International Development Limited (Melco), and has also entered into an underwriting agreement for the sale of 40.9 million shares to the public. Crown expects to receive proceeds of around AUD1.9bn, of which around AUD800m will be used to reduce net debt, around AUD600m will be paid as a special distribution to shareholders and around AUD500m will be used to fund a share buyback. The sale is subject to Melco's receipt of regulatory approval and finance. Crown also said it will not proceed with the demerger of its international assets as previously announced after it decided not to proceed with the Alon project and the reduction of its stake in MCE. KEY RATING DRIVERS Business Profile Intact: The affirmation of the rating reflects Fitch's view that these actions will not significantly impact Crown's business profile. The decision not to proceed with Alon and the sale of the 16.2% stake in MCE reduces Crown's international exposure to a level similar to that under the demerger plan, which was captured in Fitch's affirmation of Crown's ratings in October 2016 (see <a href="https://www.fitchratings.com/site/pr/1013116 ">Fitch Affirms Crown at 'BBB'; off Rating Watch; Outlook Stable published on 14 October 2016). Fitch expects Crown's credit metrics to remain in line with its rating despite the expected increase in its funding requirements over the next few years. Fitch now expects Crown's net leverage, as measured by adjusted net debt/EBITDAR, to peak 2.1x at the end of the financial year to 30 June 2020 (FY20) from 1.3x at FYE16 in the lead up to the completion of Crown Sydney and Queensbridge Tower. Strong Australian Assets: Crown's Melbourne and Perth-based properties contributed nearly 90% of its revenue for 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 announcement that it will not proceed with the Alon project in Las Vegas, includes two projects due for completion within the next six years: Crown Sydney and Queensbridge Tower. Shelving the Alon project has the same effect on Crown's exposure to associated funding requirements as the proposed demerger of its international assets, which would have included the Alon project. Crown's plans to reduce net debt by around AUD800m using proceeds from the MCE stake sale provide Crown with additional funding flexibility as it completes its two major projects. While we believed that the funding was manageable for Crown, we now expect its net leverage to peak at around 2.1x in FY20, compared with around 2.9x prior to the sale of the MCE stake. REIT IPO and Minorities: Crown is considering an initial public offering of some of its Australian hotels in a Crown-controlled real estate investment 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 to sustain leverage below 2.5x, above which Fitch would consider negative rating action, will depend on how proceeds from the sale to the REIT are applied to debt reduction and other capital management initiatives Crown may undertake to ensure it adheres to its prudent capital management approach. KEY ASSUMPTIONS Fitch's key assumptions within the rating case for Crown include: - consolidated revenue growth in the 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 2017-2020 - 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 to above 2.5x on a sustained basis SUMMARY OF FINANCIAL STATEMENT 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 Vicky Melbourne Senior Director +61 2 8256 0325 Fitch Australia Pty Ltd. Level 15, 77 King Street, Sydney, NSW 2000, Australia 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: leslie.tan@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1016624 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. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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