Melco’s Pain to Get Worse Before it Gets Better

Melco Resorts Entertainment logo
The global casino market’s recovery remains lethargic and that could spell problems for one of the world’s biggest casino operators.

Casino.org reports that Melco Resorts and Entertainment could see its debt burden balloon over the next 12 to 18 months.

The company is one of the six concessionaires in the special administration region of Macau and Moody’s Investors Service, which commented on the City of Dreams operator’s finances after its Melco Resorts Finance issued senior unsecured notes last week.

The research firm rates those bonds, which mature in 2029 with a “negative” outlook.

“Melco’s operations continue to be weak amid lingering pandemic-related disruption,” Moody’s said.

“The company reported negative earnings before interest, taxes, depreciation and amortisation of $221 million for the first nine months of 2020, compared with $1.2 billion positive EBITDA a year earlier.”

In addition to the City of Dreams, Melco’s Macau operations include Altira Macau, Studio City and Mocha Clubs.

Analysts expect the Macau recovery will gain steam in the second half of 2021, with current improvements merely incremental.

Moody’s said the rebound pace will be sluggish for most of 2021 because of travel restrictions and social distancing protocols at the Macau gaming properties.

Currently, Macau is only allowing visitors from mainland China, Hong Kong and Taiwan to enter.

As such, the research firm believes it will be 2022-23 before gross gaming revenue there returns to pre-pandemic levels.

That lethargy could be a drag on Melco, particularly with rising debt levels.

“At the same time, Moody’s expects Melco Resorts and Entertainment’s consolidated debt level, including lease liabilities, to increase to around $7 billion over the next 12-18 months from $6.1 billion as of September 30, 2020.

Expenditures for Studio City and its gaming venue in Cyprus could also limit Melco’s free cash flow, the note said.

Melco gets financial relief from lenders

Australian 100 dollar bill currency
Photo by Joshua Hoehne

It’s been a trying year for many casino operators, but for Melco Resorts it’s been particularly difficult.

Calvin Ayre reported in November that the operator lost $331 million in the third quarter and the fourth quarter is not shaping up to be much better.

Melco said its activity in Manila and Cyprus was helping to shore up its finances, but Cyprus has since taken a step backward and two Melco casinos were temporarily closed two weeks ago.

With more financial restraints on the way, the company has reached out to its lenders for relief and been granted it.

The wholly-owned Melco subsidiary that is responsible for the company’s City of Dreams Macau and Altira Macau, Melco Resorts Finance Limited, reported last Friday that it had worked out a deal with lenders to renegotiate some terms associated with credit lines it received earlier this year.

At the end of April, the company received a revolving credit facility worth $1.92 billion from a group of financial institutions, which Melco wanted to use to increase its liquidity throughout the ongoing coronavirus pandemic.

MRFL’s own subsidiary, MCO Nominee One Limited, worked with the lenders to reach a new arrangement for the credit and most of them were amenable to the alternatives.

The MRFL announcement didn’t specify who agreed and who didn’t, but explained that it had received confirmation that it could waive several covenants in the agreements, including the need to “meet or exceed the cover ratio, the ratio of consolidated EBITDA to consolidated net finance charges as such terms are defined in the Facility Agreement, of 2.5 to 1.00”, to “not exceed the senior leverage ratio of 3.5 to 1” and to “not exceed the total leverage ratio of 4.5 to 1”.

In order to receive approval for the changes, Melco’s MCO Nominee One subsidiary had to pay a “customary fee” to all of the financial institutions that approved the deal.

However, it didn’t specify how much was paid.

William Brown

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