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Fitch Assigns Final 'CCC' Rating to IPI; Downgrades Proposed Secured Notes to 'B-(EXP)'
January 11, 2017 / 10:39 AM / a year ago

Fitch Assigns Final 'CCC' Rating to IPI; Downgrades Proposed Secured Notes to 'B-(EXP)'

(The following statement was released by the rating agency) HONG KONG, January 11 (Fitch) Fitch Ratings has assigned Hong Kong-based Imperial Pacific International Holdings Limited (IPI) a final Long-Term Foreign-Currency Issuer Default Rating (IDR) of 'CCC', which has been downgraded from the 'B(EXP)' expected rating assigned in September 2016. Fitch has also downgraded the casino resort operator's proposed US dollar senior secured note issue to an expected 'B-(EXP)' rating, from 'BB-(EXP)'. The Recovery Rating remains at 'RR2'. The downgrade of the final ratings reflects the company's need to fund advances to customers and bear customers' credit risk due to the lack of licensed junket operators in Saipan. In addition, the company has still not secured sufficient long-term funding for the construction of its casino and resort. The proposed notes, which will be issued by Imperial Pacific International (CNMI), LLC (Saipan), are rated two notches above IPI's IDR because they are secured by essentially all the assets of the casino and resort under construction and guaranteed by Imperial Pacific Properties (CNMI), LLC, which owns the lease of the land on which the resort is built, and by the parent, IPI. Final ratings are contingent upon the receipt of final documents conforming to information already received. KEY RATING DRIVERS Lack of Junkets: So far only one junket has been licensed by the Commonwealth Casino Commission of Saipan. Thus, IPI has been operating its VIP business through third-party introductions and internal marketing, with IPI granting credit directly to VIP customers who are partly backed by guarantors. Fitch believes IPI's receivable days have expanded well beyond 100 days in view of the strong VIP rolling chips volume in the past six months. Operating cash generation is likely to be low, despite strong revenue growth. Receivables risk may only improve after more junkets are licensed to operate with IPI, which is only likely to occur once the new casino is completed. Capex Funding Not Finalised: IPI's casino license requires the casino to start operating by April 2017 and the hotel resort by August 2017. Fitch believes IPI is on target to meet its construction deadline, but longer-term capex funding for the casino and hotel resort is not yet in place. Construction to date has been funded via short-term borrowings and internal cash generation. Failure to secure funding for the completion of both construction phases may further pressure IPI's liquidity. Volatile VIP segment: IPI's ratings are driven by the short operating history of its gaming business in Saipan, which is almost entirely driven by the volatile high-rolling VIP segment. The segment is junket-driven and subject to policy uncertainty. The Commonwealth Casino Commission of Saipan is vetting a number of junket operators before they start doing business with IPI. Short Operating Record: The sustainability of IPI's niche casino business model depends on its ability to manage relationships with VIPs and receivable risks. The company has about one year of operating history in its temporary casino. Monthly VIP rolling chips consistently amount to more than USD1.5bn each month. Initial performance for IPI's temporary casino in Saipan may not be sustainable as the curiosity factor fades. Active Tourism Development: Lodging is currently the major bottleneck for the increasing number of VIP visitors, but this is being addressed with the opening of a new luxury hotel in 2016 and the opening of IPI's own hotel in 2Q17. In addition, flight frequencies to Saipan from cities in north-east Asia are gradually increasing. Saipan's Advantages: IPI leverages on its competitive advantage in attracting VIPs in a low gaming tax and safe environment under US laws. IPI paid a 1.3% rebate to VIPs in 1H16; it received approval from the Commonwealth Casino Commission to pay a rebate to VIPs of up to 1.8%, which is higher than the rates paid in most other Asian countries. Saipan is well-positioned to cater to players in north-eastern China, with flight time of around five hours and a visa-on-arrival policy for Chinese citizens. KEY ASSUMPTIONS Fitch's key assumptions within the rating case for IPI include: - gross gaming revenue of USD0.9bn-1.0bn in 2016 and USD1.0bn-1.4bn a year in 2017-2019; - 70% of VIP revenue sourced from junket operators or introductions in 2016-2019; - commission rates of 1.40% to VIP and 1.85% to junket operators in 2016-19; and - capex of USD200m-300m in 2016 and USD300m-400m in 2017. RATING SENSITIVITIES Positive: Developments that may, individually or collectively, lead to positive rating action include: - Ability to secure sufficient funding from internal or external sources to cover capex and refinancing needs, leading to the successful opening of the new casino by the end of 1Q17 and resort by the end of 2Q17. - Trade receivable days from VIP gross gaming revenue sustained within 100 days, which is only likely to occur after the commencement of junket operations (June 2016: 79 days). Negative: Developments that may, individually or collectively, lead to negative rating action include: - Failure to secure sufficient funding to cover capex and refinancing needs, leading to substantial cost-overruns or a delay in the opening of the new casino or resort. - Significant worsening of operational cash flow due to longer trade receivable days after the opening of the new casino LIQUIDITY Financing Plan: IPI had short-term debt of HKD1.1bn (USD142m), convertible bonds of HKD561m due August 2017 and a capex commitment of HKD3.0bn as at end-June 2016. These amounts were intended to be satisfied by the proposed issuance of US dollar senior secured notes and other potential debt facilities. However, Fitch expects the need to fund customers and ongoing capex to have impacted IPI's liquidity position as at end-2016. Contact: Primary Analyst Rebecca Tang Associate Director +852 2263 9933 Fitch (Hong Kong) Limited 19/F, Man Yee Building 68 Des Voeux Road, Hong Kong Secondary Analyst Vicki Shen Director +852 2263 9918 Committee Chairperson Kalai Pillay Senior Director +65 6796 7221 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, 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=1017397 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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