The Empire Resorts acquisition will delay Genting’s ability to bring its net leverage closer to 1 time by end-2021
by MARK RAO/ pic by BLOOMBERG
GENTING Malaysia Bhd’s (GenM) acquisition of loss-making Empire Resorts Inc (ER) is expected to challenge its holding company’s Genting Bhd’s deleveraging efforts, according to Fitch Ratings Inc.
The credit rating agency said this resulted in it lowering the outlook for Genting from ‘Stable’ to ‘Negative’ on the risk that the company fails to deleverage to a level consistent with its current rating.
“The outlook revision reflects Fitch’s view of Genting’s reduced rating headroom, as we believe the company is pursuing a more aggressive investment strategy,” it said in its report this week.
“Higher than expected leverage and weaker earnings performance will imply a shift from an intensive focus on capital discipline, and indicate a weaker credit profile.”
The rating agency noted GenM’s decision to acquire up to 49% stake in the Nasdaq-listed ER comes at a time when its parent, Genting, is concurrently committed to other large-scale capital expenditure (capex) in the next two to three years. This is expected to delay Genting’s ability to bring its net leverage closer to one time by end-2021.
Note that Fitch anticipates the company’s net leverage to peak in 2020 at 2.1 times before declining to 1.5 times in 2021 due to the ER acquisition and additional investment commitments in Singapore.
This is against its previous expectation of 1.6 times and 1.1 times respectively. “Fitch believes that deleveraging ability depends on achieving a quick turnaround in operations at ER and deriving adequate returns from its other capex,” it said.
“The company is confident of the earnings potential of its investments, while we think actual returns could be lower than expected due to competition and other pressures,” Fitch noted.
GenM agreed to purchase a 46% stake in ER from Kien Huat Realty III Ltd for US$128.6 million (RM538.8 million) earlier this month. Kien Huat Realty is the investment vehicle of Tan Sri Lim Kok Thay — chairman and CEO for both Genting and GenM.
Through its wholly owned unit, Genting (USA) Ltd (GenUSA), GenM formed a joint-venture (JV) company with Kien Huat Realty, namely Hercules Topco LLC, where both parties agreed to place all their common stocks held in ER into the JV.
GenUSA and Kien Huat Realty will hold 49% and 51% membership interests respectively in the JV which is to undertake the planned delisting of ER from the US stock market.
Currently listed on Nasdaq, ER owns and operates Resorts World Catskills (RWC) and Monticello Casino and Raceway in New York.
GenM’s planned acquisition of a stake in ER came under scrutiny when the latter notified its shareholders of the option of filing for voluntary Chapter 11 bankruptcy. This is in view of facilitating the easier restructuring of its sizeable US$400 million in debt.
GenM defended its investment in ER, stating that the latter’s RWC is one of the newest and highest quality gaming assets in the northeast region of the US, with over US$900 million invested in the resort.
GenM itself has been participating in the New York gaming market close to a decade via Resorts World New York (RWNY).
It said the ER acquisition will facilitate synergies between RWNY and RWC and provide both assets with economies of scale which, in turn, will result in net cost reduction and improved earnings.
Investors were not positive on the news with shares in GenM having lost RM4.93 billion in market capitalisation this month alone. It closed three sen lower at RM3.04 yesterday.
The long-term issuer default rating and senior unsecured rating for Genting was affirmed at ‘A-’.