Crown Resorts has options to fund capex plans: analysts - 10th January 2015

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CROWN Resorts has several options to fund its ambitious $3 billion spending program, aside from raising equity.

Indeed the casino operator may be able to sustain its investment-grade ratings through raising hybrid debt or introducing a join venture partner, analysts say.

Crown, controlled by James Packer, is expanding with various costly projects, both domestically and internationally, to drive future growth. The committed projects span from Perth, Sydney and Melbourne. There are potential developments in Brisbane, Las Vegas and Sri Lanka and even Japan on the cards.

Morgan Stanley analysts estimate Crown will spend $3bn on project capex and investments between financial years 2015 and 2019, peaking in financial year 2016.

Although some bankers believe Crown may potentially raise equity to fund these significant capex commitments, Morgan Stanley analysts say this is unlikely.

“Industry feedback suggests that (Crown) has flexibility to fund this, by raising hybrid debt (similar to that already on the balance sheet) that may be treated as equity, cutting dividends or introducing JV partners,” Morgan Stanley said in a research note.

Although hybrid debt typically demands a higher credit spread, it is less burdensome on Crown’s credit rating, the analysts also noted.

Crown is currently rated two notches above sub-investment grade, with a “BBB” rating by both Fitch and S&P. Moody’s this week reaffirmed its Ba3 rating on Crown, even as it expressed caution over the revenue outlook for is Macau joint venture Melco Crown.

Analysts forecast Crown’s net debt to increase from $1.7bn in financial year 2014 to $3.5 billion by financial year 2018, while its pre-tax earnings is expected to reach just over $1 billion by then.

However, Crown’s balance sheet will remain safe from any negative implications on its credit rating if all the new borrowings is raised as hybrid debt, according to the analysts’ calculations.

Alternatively, Crown may reduce its capex burden by introducing a joint venture partner, particularly for larger constructions like the $1.5bn Sydney Barangaroo project.

“If Crown raises hybrid debt (as it has previously) or introduces a JV partner to fund the capex, then Crown may be able to sustain its investment grade rating at a level of relative comfort,” the analysts said.

It is also likely for Crown to cut dividends, as the company will “prioritise completing expansion projects ahead of growing or sustaining dividends”, they added.

Last week Crown’s Melco Crown Entertainment venture applied to delist from the Hong Kong Stock Exchange just three years after listing its shares in the Chinese financial hub, citing limited fundraising opportunities and onerous compliance obligations and costs.

The gambling company, which is 33.6 per cent owned by Crown Resorts, operates casinos in Macau, said it would maintain its primary listing of American depositary shares on the Nasdaq Stock Market, where Melco Crown has been listed since December 2006.

(The Australian)