Fitch Affirms Australia's Crown Resorts at 'BBB'; Outlook Stable

(The following statement was released by the rating agency) Fitch Ratings-Sydney-24 September 2020: Fitch Ratings has affirmed Australia-based gaming operator Crown Resorts Limited's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'BBB'. The Outlook is Stable. The rating on the outstanding Japanese yen-denominated senior unsecured notes issued by Publishing and Broadcasting (Finance) Limited is also affirmed at 'BBB'. A full list of rating actions is at the end of this commentary. Fitch has affirmed Crown's rating despite our expectation that its leverage will rise significantly and exceed the negative rating sensitivity in the financial year ending June 2021 (FY21), as its Crown Melbourne property remains closed and it adds debt to complete its Sydney casino over the rest of FY21. However, once Crown Melbourne reopens, we expect Crown to be able to deleverage to well within the guidelines for the current rating from FY22. We believe that initial performance of the property will include effects of pent-up demand, and that the longer-term recovery and growth will be more gradual due to weaker household finances amid the economic strain in Australia, which we have included in our expectations. We expect the Melbourne property to generate a significant share of its usual domestic gaming revenue once it reopens. This is despite social distancing measures, which is consistent with the performance of other casinos in Australia, including Crown Perth, which reopened in late June 2020. The main risk to our expectations is a prolonged shutdown in Melbourne. However, coronavirus infections are falling, and the Victorian government has flagged the start of easing of restrictions. Even if the restrictions remain in place until 2021, Crown's variable cost structure will allow it to continue to minimise cash outflows as its Melbourne property will remain closed and limit the impact on its financial position. This flexibility, combined with the headroom it had at its current rating level entering the pandemic, will allow its credit metrics to quickly return to within the guidance by FY22 and supports our Stable Outlook. We have revised our leverage sensitivity and now use funds from operations, and not EBITDAR, in the denominator, to allow greater comparability with global gaming peers. To reflect the difference between FFO and EBITDAR, the threshold has changed by 0.4x based on historical average. Key Rating Drivers Severe COVID-19 Impact: Crown's operations have been, and continue to be, severely impacted by restrictions to combat the coronavirus in Australia. Both its Perth and Melbourne properties were closed in 4QFY20 and Fitch expects the Melbourne property to remain closed until around the end of 2020. The closure in Melbourne and the capex for the completion of Crown Sydney will send Crown's leverage up to a peak of 7.4x in FY21, but Crown's ability to control and reduce expenses, combined with operations restarting, will bring leverage down to 1.7x by FYE22, well within its rating sensitivities. Strong Australian Assets: We believe Crown's Melbourne and Perth properties, which accounted for over 90% of revenue since FY18, will continue to benefit from predictable local markets and Crown's position as each region's sole licensed casino operator. The properties generated stable cash and EBITDA in the past decade, with persistent weakness in Perth's mass-market demand offset by higher mass-market demand in Melbourne prior to the pandemic. Crown has been able to generate cash again from early-FY21 with the reopening of its Perth property, while Melbourne remained closed. The group's cashflow from operations - before capex and dividends - will be positive once both properties are open, until at least FYE24. Lower VIP Business; Limited Impact: VIP demand at both properties declined, reflecting the volatility in the global casino market. Border restrictions in place to combat COVID-19 will see VIP revenues remain low over the foreseeable future. Nevertheless, this volatility has minimal effect on the group's overall results, because VIP revenue made up less than 25% of normalised group revenues from FY16. Conservative Capital Structure: Crown's ability to absorb the effects of the shutdowns, continue funding the construction of its Crown Sydney property, and return its leverage to within the guidelines for its rating within one year benefitted from the conservative financial profile it maintained since it exited its international businesses. This headroom will also allow Crown to absorb the expected slower start at its Sydney premium casino as VIP demand remains subdued given restrictions on international travel and the recession in Australia over the next couple of years. Fitch believes that Crown showed its commitment to maintaining its balance-sheet strength by the skipping a final dividend, despite its fixed dividend policy, and the securing of over AUD1 billion in additional debt facilities at the beginning of the pandemic to manage through the disruptions and to meet its obligations, including the completion of Crown Sydney. Development Pipeline Winding Down: The Crown Sydney project is due to be completed by end-FY21. While Crown may embark on other projects over the next few years, we have not included any cash outflow for development of the One Queensbridge project in Melbourne while the company decides on the structure for the project. Crown also has the ability to time development around incremental cash flows to maintain its strong financial profile - particularly if operations remain disrupted as a result of government restrictions. 50% Equity Credit Applied: Fitch continues to apply 50% equity credit to Crown's hybrid securities as we expect the securities to remain a permanent feature of its capital structure based on discussions with management. Derivation Summary Crown's 'BBB' rating reflects its strong financial profile and the strength of its Australian assets. It compares well with its global peer, Las Vegas Sands Corp (LVS, BBB-/Negative), whose rating also benefits from its strong financial profile and high-quality assets in attractive regulatory regimes. LVS has better geographical diversification, with one of the best global market exposures in the industry. However, the impact of the coronavirus has been harsher on these markets and is reflected in the Negative Outlook on LVS's rating. In contrast, Crown benefits from its diversification across Australia in favourable regulatory regimes that have a more stable and mature demand profile and from being the sole licensed casino operator in each region. We believe Crown's better financial profile and exposure to more stable and mature demand environment underscores the one-notch differential with LVS. Key Assumptions Fitch's Key Assumptions Within Our Rating Case for the Issuer - Revenue to decline by around 30% in FY21 due to ongoing pandemic-related restrictions. Revenue to almost double yoy in FY22 and return to around FY19 levels in FY23, excluding the impact of the Crown Sydney opening. - Australian property normalised EBITDA margin of around 25% from FY22 to FY24, excluding the effect of any variance from the theoretical win-rate and including commencement of operations at Crown Sydney (FYE20: 22%). - Crown Sydney to begin operations from 2HFY21 - Dividends of 60 cents per share in each year from FY21 to FY24 - Capex of around AUD670 million in FY21, AUD150 million in FY22, and AUD130 million in FY23 and FY24, before apartment sales at Crown Sydney RATING SENSITIVITIES Factors that could, individually or collectively, lead to positive rating action/upgrade: 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 over the longer term include: - Free cash flow, as measured by cash flow from operations less capex and dividends, moving towards a sustainable positive position; - FFO adjusted net leverage (excluding working capital cash) below 2.2x for a sustained period; and - Diversification outside of Australia land-based gaming. Factors that could, individually or collectively, lead to negative rating action/downgrade: - FFO adjusted net leverage (excluding working capital cash) rising to above 2.9x for a sustained period. Best/Worst Case Rating Scenario International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579. Liquidity and Debt Structure Strong Liquidity: Crown reported that it had an available cash balance of around AUD240 million and committed undrawn bank facilities of around AUD400 million at FYE20. Its continued strong access to capital markets and ability to support its strong liquidity position was demonstrated by its ability to secure over AUD1 billion in additional debt facilities to help it manage through the market, economic and social disruptions as a result of the coronavirus-related lockdowns, including AUD450 million in project financing to continue the construction of Crown Sydney. Crown also has other levers available to protect its cash position as its business remains severely disrupted. These include its highly variable cost structure - benefiting in particular from the ownership of its properties (and rentals for the Melbourne land are minimal under the agreement with the Victorian government) and the lower incurrence of gaming taxes, which directly reflect the decline in gaming volumes. Crown also implemented extraordinary measures, such as the suspension of dividend payouts, even though it has a fixed-dividend policy, to preserve cash and maintain the strength of its balance sheet. Further, Crown has no significant bond maturities before FY25 and manageable covenant risk. REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING The principal sources of information used in the analysis are described in the Applicable Criteria. ESG Considerations Crown has an ESG Relevance Score of 4 for Management Strategy, which reflects the probity review the New South Wales' Independent Liquor and Gaming Authority is undertaking with respect to Crown's Sydney operations. This has a negative impact on the company's credit profile and is highly relevant to the rating. Except for the matters discussed above, the highest level of ESG credit relevance, if present, is a score of 3 - ESG issues are credit neutral or have only a minimal credit impact on the entity(ies), either due to their nature or the way in which they are being managed by the entity(ies). For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg. Crown Resorts Limited; Long Term Issuer Default Rating; Affirmed; BBB Publishing and Broadcasting (Finance) Limited ----senior unsecured; Long Term Rating; Affirmed; BBB Contacts: Primary Rating Analyst Kelly Amato, CFA Director +61 2 8256 0348 Fitch Australia Pty Ltd Suite 15.01, Level 15 135 King Street Sydney 2000 Secondary Rating Analyst James Hollamby, Associate Director +61 2 8256 0347 Committee Chairperson Vicky Melbourne, Senior Director +61 2 8256 0325 Media Relations: Peter Hoflich, Singapore, Tel: +65 6796 7229, Email: peter.hoflich@thefitchgroup.com Additional information is available on www.fitchratings.com Applicable Criteria Corporate Hybrids Treatment and Notching Criteria (pub. 11 Nov 2019) (https://www.fitchratings.com/site/re/10100477) Corporate Rating Criteria (pub. 01 May 2020) (including rating assumption sensitivity) (https://www.fitchratings.com/site/re/10120170) Corporates Notching and Recovery Ratings Criteria (pub. 14 Oct 2019) (including rating assumption sensitivity) (https://www.fitchratings.com/site/re/10090792) Sector Navigators - Addendum to the Corporate Rating Criteria (pub. 26 Jun 2020) (https://www.fitchratings.com/site/re/10125796) Applicable Model Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s). 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