Rating Action Overview
- The recovery in Macao's gross gaming revenue (GGR) in 2023 has been faster than we anticipated. We now expect mass GGR in Macao to improve to 75%-85% of 2019 levels, rather than our previous forecast of 60%-70%.
- Our update implies Melco Resorts & Entertainment Ltd. (MLCO) will finish 2023 with a leverage ratio of 6.3x, down from our previous expectation of 6.9x. Leverage should further drop to 3.8x in 2024, below our downgrade threshold for the current ratings.
- As a result, we revised the rating outlook on MLCO's operating subsidiaries, Melco Resorts (Macau) Ltd. (MRM) and Studio City Co. Ltd., to stable from negative. At the same time, we affirmed our long-term issuer and issue credit ratings on MRM at 'BB-' and on Studio City at 'B+'.
- The stable rating outlook reflects our view that Macao's faster mass-market recovery should allow MLCO to recover its revenue and cash flow strongly in 2023 and reduce its leverage to below our downgrade threshold in late 2023 or early 2024.
Rating Action Rationale
MLCO's Macao revenue and cash flow are recovering materially faster than we previously assumed, supporting more rapid deleveraging. Macao's gaming revenue has been rebounding faster than we anticipated. This follows a relaxation of COVID-19 control measures and travel restrictions earlier in the year. In the first quarter of 2023, industry mass GGR recovered to 67% of the level of the first quarter 2019. VIP GGR recovered to 23% of the level.
We previously thought mass GGR in the first quarter of 2023 would recover to only 35%-40% of 2019 levels, before the recovery strengthens in the second half and reach 60%-70% of 2019 levels in 2023.
We now expect mass GGR to recover to 75%-85% of 2019 levels this year and to fully recover in 2024. In our view, VIP GGR may stay at 20%-25% of 2019 levels in 2023.
In the first quarter 2023, MLCO's reported hold-adjusted EBITDA recovered to about 50% of the level of the first quarter of 2019. The recovery should accelerate over the next several quarters, on the back of higher Macao visits, higher availability of hotel rooms, and incremental contributions from Studio City Phase 2 (opened on April 6, 2023).
Reflecting this, we raised our EBITDA forecast by 13.5% to US$1.1 billion for 2023 and by 2.5% to US$1.5 billion for 2024. These are about 70% and 103% of 2019 levels, respectively.
MLCO's debt-to-EBITDA ratio should drop to 3.8x in 2024 from 6.3x in 2023.
Moderate capital expenditure (capex) will support a return to healthy free operating cash flow (FOCF). Our base case assumes MLCO will spend about US$300 million on capex in 2023 and US$330 million in 2024, down from close to US$600 million in 2022. The group has completed the construction of Studio City Phase 2 and will be completing City of Dreams Mediterranean this year. Our forecasts include maintenance expenditure of US$150 million-US$180 million, and investments committed under the group's Macao concession.
The Melco group has agreed to invest about US$1.5 billion in capital and operating expenses (excluding the incremental amount depending on actual GGR). It could spread the commitments over the 10-year term of its new concession. The spending will include non-gaming capex and operating expenses to support non-gaming amenities and events.
With that, MLCO may generate FOCF of more than US$670 million in 2023 and US$930 million in 2024. The group is likely to use the bulk of the cash for debt repayment because we believe it will be prudent in the resumption of dividend payments.
Outlook
The stable rating outlook on MRM and Studio City reflects our view that Macao's faster mass-market recovery will support a strong recovery in MLCO's revenue and cash flow and an improvement in leverage to 3.8x in 2024, below our downgrade threshold of 4.5x.
Downside scenario
We may lower our ratings on MRM and Studio City if Macao's GGR does not recover in a manner that supports a reduction in MLCO's debt-to-EBITDA ratio to 4.5x or below in 2024. We base our threshold on our assumption of a 5.0x ratio at Melco International Development Ltd. (MID), the ultimate parent of the group.
Upside scenario
We could raise our ratings if MLCO restores and sustains its leverage to below 3.5x. This may happen in the second half of 2024, assuming a full recovery in Macao's mass gaming market and no material investments or shareholder returns by MLCO.
An upgrade may happen earlier if Macao's market recovery is much stronger than we expect in the rest of 2023.
Company Description
MLCO is a developer and operator of casinos and entertainment resorts. The two rated entities, MRM and Studio City, are MLCO's key operating subsidiaries in Macao.
MRM is one of the six gaming concessionaires in Macao, with a property portfolio that includes City of Dreams, Altira, and the Mocha clubs.
Studio City runs the Studio City integrated resort in Cotai, Macau. MRM operates the gaming areas of Studio City pursuant to an agreement entered with Studio City.
Outside Macao, MLCO owns and operates City of Dreams Manila in the Philippines. MLCO is now building a integrated resort, City of Dreams Mediterranean, in Cyprus.
MID is the ultimate parent of the group, with no material operating assets beyond MLCO. Founder and controlling shareholder, Mr. Lawrence Ho, holds 59% of MID.
Our Base-Case Scenario
Assumptions
- China's real GDP to expand 5.5% in 2023 and 5.0% in 2024, from 3.0% in 2022.
- Macao to remain a strong market for mass gaming. Economic growth in China--from a growing middle class, improving infrastructure connecting mainland China and Macao, and planned hotel capacity expansion in Macao--to support this.
- Macao's mass-market GGR in 2023 to be 75%-85% of 2019 levels and recover to pre-pandemic levels in 2024.
- Macao's VIP market to remain weak due to tightened regulations on junkets. VIP GGR to be only 20%-25% of historical levels in 2023, following a cessation of junket VIP operations.
- The recovery at MLCO's Macao operations to mirror that of the overall Macao market.
- A more favorable VIP/mass mix and better cost management to improve MLCO's EBITDA margins in 2023-2024.
- MLCO's capex to be about US$300 million in 2023 and US$330 million in 2024. Includes maintenance capex and new investments in non-gaming amenities. Our forecast assumes the entire investment commitment will be spent through capex as the split between capex and operating expenditure is unknown.
- Minuscule dividends and share buybacks in 2023.
| Melco Resorts And Entertainment Ltd.--Key Metrics* | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Mil. US$ | 2021a | 2022a | 2023e | 2024f | 2025f | |||||||
| EBITDA | 100 | (135) | 1,055 | 1,519 | 1,652 | |||||||
| Capital expenditure | 649 | 558 | 302 | 327 | 327 | |||||||
| Debt | 5,796 | 7,355 | 6,677 | 5,810 | 4,882 | |||||||
| Debt to EBITDA (x) | N.M. | N.M. | 6.3 | 3.8 | 3.0 | |||||||
| FFO to debt (%) | N.M. | N.M. | 8.4 | 18.7 | 26.6 | |||||||
| *All figures adjusted by S&P Global Ratings. a--Actual. e--Estimate. f--Forecast. FFO--Funds from operations. N.M.--Not meaningful. | ||||||||||||
Environmental, Social, And Governance
ESG credit indicators: To E-2, S-3, G-2; From E-2, S-4, G-2
Health and safety factors have improved for MRM and Studio City, in our view. They are now a moderately negative consideration in our credit analysis. As a result, we revised our social credit indicator to S-3 from S-4.
China's zero-COVID-19 policy had severely depressed the group's cash flow in Macao for nearly three years. However, visits to the market and revenue have been recovering faster than we previously expected following a relaxation of those policies earlier this year.
While we view the pandemic as a rare and extreme disruption that is unlikely to recur at the same magnitude, health and safety scares remain an ongoing risk factor for MRM and Studio City. In addition to health and safety scares, increased regulations to address social risks can periodically introduce volatility in gaming revenue and profitability.
For instance, concerns over a proliferation of gaming, rapid GGR growth, and perceived corruption led the Chinese central government to impose visa restrictions, increase scrutiny of the movement of money in and out of Macao, and increase enforcement of marketing restrictions in 2015. These regulatory changes contributed to a 34% decline in Macao's GGR in 2015. The government's commitment to diversifying revenue in Macao can also lead to higher capital spending by operators to develop non-gaming amenities.
Ratings Score Snapshot
Melco Resorts (Macau) Ltd.
Issuer Credit Rating: BB-/Stable/--
Stand-alone credit profile: N/A
- Group credit profile: bb-
- Entity status within group: Core
Studio City Co. Ltd.
Issuer Credit Rating: B+/Stable/--
Business risk: Weak
- Country risk: Intermediate
- Industry risk: Intermediate
- Competitive position: Weak
Financial risk: Highly Leveraged
- Cash flow/leverage: Highly Leveraged
Anchor: b-
Modifiers:
- Diversification/Portfolio effect: Neutral (no impact)
- Capital structure: Neutral (no impact)
- Financial policy: Neutral (no impact)
- Liquidity: Adequate (no impact)
- Management and governance: Fair (no impact)
- Comparable rating analysis: Neutral (no impact)
Stand-alone credit profile: b-
- Group credit profile: bb-
- Entity status within group: Strategically important (+2 notches from SACP)
Environmental, social, and governance (ESG) credit factors for this change in credit rating/outlook and/or CreditWatch status:
- Health and safety
Related Criteria
- General Criteria: Environmental, Social, And Governance Principles In Credit Ratings, Oct. 10, 2021
- General Criteria: Group Rating Methodology, July 1, 2019
- Criteria | Corporates | General: Corporate Methodology: Ratios And Adjustments, April 1, 2019
- Criteria | Corporates | General: Reflecting Subordination Risk In Corporate Issue Ratings, March 28, 2018
- Criteria | Corporates | General: Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014
- Criteria | Corporates | General: Corporate Methodology, Nov. 19, 2013
- General Criteria: Methodology: Industry Risk, Nov. 19, 2013
- General Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013
- General Criteria: Methodology: Management And Governance Credit Factors For Corporate Entities, Nov. 13, 2012
- General Criteria: Principles Of Credit Ratings, Feb. 16, 2011
Related Research
- Melco Resorts And Studio City Ratings Affirmed On Macao's Brighter Gaming Prospects, Off CreditWatch; Outlook Negative, Jan. 6, 2023
- Melco Remains On CreditWatch Amid Licensing And Recovery Risks, Nov. 4, 2022
- Macao Casino Ratings Stay On Watch Negative As Uncertainties Continue About Recovery, Licensing, Sept. 30, 2022
- Melco Resorts And Studio City Ratings Placed On CreditWatch Negative As COVID Surge Clouds The Path To Recovery, July 7, 2022
Ratings List
| Ratings Affirmed; Outlook Action | ||
|---|---|---|
| To | From | |
|
Melco Resorts (Macau) Ltd. |
||
| Issuer Credit Rating | BB-/Stable/-- | BB-/Negative/-- |
|
Studio City Co. Ltd. |
||
| Issuer Credit Rating | B+/Stable/-- | B+/Negative/-- |
| Ratings Affirmed | ||
|
Studio City Co. Ltd. |
||
| Senior Secured | B+ | |
|
Melco Resorts Finance Ltd. |
||
| Senior Unsecured | BB- | |
|
Studio City Finance Ltd. |
||
| Senior Unsecured | B+ | |
Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. Complete ratings information is available to subscribers of RatingsDirect at www.capitaliq.com. All ratings affected by this rating action can be found on S&P Global Ratings' public website at www.standardandpoors.com. Use the Ratings search box located in the left column.
| Primary Credit Analyst: | Aras Poon, Hong Kong (852) 2532-8069; aras.poon@spglobal.com |
| Secondary Contact: | Manqi Xie, CFA, Hong Kong 852-2532-8001; manqi.xie@spglobal.com |
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