Fitch Places Crown Resorts on Rating Watch Negative on Increased Regulatory Risks

(The following statement was released by the rating agency) Fitch Ratings-Sydney-24 November 2020: Fitch Ratings has placed Crown Resorts Limited's 'BBB' Long-Term Issuer Default Rating (IDR) and senior unsecured rating on Rating Watch Negative (RWN) following the announcement that New South Wales' (NSW) Independent Liquor & Gaming Authority (ILGA) has delayed the opening of Crown's Sydney casino until February 2021. The ILGA said on 18 November 2020 it has deferred its consideration of a number of applications that are required for Crown to commence gaming operations at its new Sydney property following the company's admission during its final submissions to the NSW inquiry that money laundering was likely to have occurred at its Melbourne and Perth casinos. The Victorian Commission for Gambling and Liquor Regulation subsequently issued a notice of demand to Crown to obtain the same information for review, while the West Australian Gaming and Wagering Commission said it will consider its position in relation to Crown Perth once the recommendations from the NSW inquiry are handed down next year. The RWN reflects Fitch's opinion that these actions highlight an increased risk of severe regulatory action being taken by ILGA, including a loss of licence, and have heightened the potential for further regulatory action by the Victorian and Western Australian regulators that would have a significant impact on the company's business or financial profile, which would lead to Fitch downgrading Crown's ratings. Our previous Negative Outlook reflected that, under our base case, Crown would be able to absorb around AUD800 million in fines and penalties, enabling its financial profile to remain consistent with its rating. Key Rating Drivers ESG - Governance Structure: Crown has an ESG Relevance Score of 5 for Governance Structure. The regulatory inquiries into its compliance with various laws, regulations and licensing requirements, including anti-money laundering, indicate weaknesses in its risk management and internal control structures, as well as the level of board oversight. These investigations follow the July 2019 probe of Crown breaching Chinese gaming laws. The weakness has exposed Crown to punitive fines and penalties and increased regulatory oversight. The RWN captures the escalating regulatory risks, highlighted by the deferment of the opening of Crown Sydney's casino, which not only affects Crown's Sydney licence but also extends to its other properties. Crown announced at its annual general meeting it will take steps to address deficiencies in its internal control structure, including forming a compliance and financial crime department that will report directly to the board. The gaming operator has already announced that it will permanently cease dealing with all junket operators, the main factor in the initiation of the investigations. However, our view of the governance structure will turn positive only upon successful implementation of all the measures announced and any further measures required by regulators to address these weaknesses. ESG - Management Strategy: Crown has an ESG Relevance Score of 5 for Management Strategy. Crown's activities with junket operators and failure to set appropriate risk-management procedure oversight, which led to the current inquiries, indicate failure in management's execution of its strategy. This contributed to the RWN. Our view of management strategy will also turn positive only if the measures announced and required by regulators are successfully implemented - noting Crown has already announced it will permanently cease its activities with all junket operations. Severe Coronavirus Impact: Crown's Perth and Melbourne properties were closed in the quarter ended June 2020. The Melbourne closure and the capex for completion of Crown Sydney will cause the company's leverage to peak at 7.4x in the financial year ending June 2021 (FY21), but Crown's ability to control and reduce expenses, combined with operations restarting, will lower leverage to 1.7x by FYE22. Crown resumed cash generation from early FY21 with the reopening of its Perth property, while Melbourne restarted operations on a restricted basis on 23 November 2020. The group's cash flow from operations - before capex and dividends - will be positive with both properties re-opened, until at least FYE24. Lower VIP Business, Limited Impact: VIP demand at both properties has declined, reflecting the volatility in the global casino market. Border restrictions in place to combat COVID-19 will see VIP revenue remain low over the foreseeable future. Nevertheless, this volatility has a minimal effect on the group's overall results, because VIP revenue made up less than 25% of normalised group revenue from FY16. Crown's Melbourne and Perth properties, which accounted for over 90% of revenue since FY18, have generated stable cash and EBITDA in the past decade from predictable local markets and Crown's position as each region's sole licensed casino operator. Conservative Capital Structure: Crown's conservative financial profile since exiting its international business helped the company absorb the effects of the shutdowns and fund the completion of its Crown Sydney property, and will help the company return its leverage to within the guidelines for its rating within one year. This headroom will also allow Crown to absorb the potentially slower start at its Sydney premium casino as VIP demand remains subdued due to restrictions on international travel and the recession over the next couple of years. Committed to Maintain Financial Profile: Fitch believes Crown showed its commitment to maintaining its balance-sheet strength by 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 the disruptions and meet its obligations, including the completion of Crown Sydney. 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 broader 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 our 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 a more stable and mature demand environment underscore the one-notch rating 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. - Dividend 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 each in FY23 and FY24, before apartment sales at Crown Sydney. RATING SENSITIVITIES Factors that could, individually or collectively, lead to positive rating action/upgrade: Fitch will resolve the Rating Watch once we can assess the outcomes of the various regulatory inquiries and their impact on Crown's ongoing operations and financial profile. We may affirm the rating if it maintains its Sydney licence and its FFO adjusted net leverage (excluding working-capital cash) below 2.9x for a sustained period. 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, which could occur as a result of the outcomes of the regulatory inquiries or other operational factors. - Crown's inability to rectify the identified weaknesses inherent in its governance structure, and/or its Sydney's licence is revoked together with the emergence of further similar allegations, or imposition by regulators of onerous conditions or fines on resolution of the inquiries. 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 Healthy Liquidity: Crown reported 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 were 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 measures available to protect its cash position as its business remains severely disrupted. These include its highly variable cost structure, benefitting in particular from the ownership of its properties (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 volume. Crown has 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 the balance sheet. Furthermore, 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. Crown Resorts Limited; Long Term Issuer Default Rating; Rating Watch On; BBB; Rating Watch Negative Publishing and Broadcasting (Finance) Limited ----senior unsecured; Long Term Rating; Rating Watch On; BBB; Rating Watch Negative 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 Leslie Tan, Singapore, Tel: +65 6796 7234, Email: leslie.tan@thefitchgroup.com Additional information is available on www.fitchratings.com Additional Disclosures Solicitation Status (https://www.fitchratings.com/site/pr/10144451#solicitation) Endorsement Status (https://www.fitchratings.com/site/pr/10144451#endorsement_status) Endorsement Policy (https://www.fitchratings.com/site/pr/10144451#endorsement-policy) ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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