Genting's Singapore Redevelopment to Have Modest Leverage Impact

 

Fitch Ratings-Singapore-10 April 2019: Genting Singapore's (GENS) SGD4.5 billion five-year redevelopment plan at Resorts World Sentosa (RWS) will have a modest impact on leverage and earnings, Fitch Ratings says. Parent Genting Berhad's (Genting, A-/Stable) ratings are not affected by the redevelopment of the integrated resort as the impact on its credit metrics is manageable within its current rating. 

GENS and the operator of Singapore's other casino, Las Vegas Sands Corp (BBB-/Positive), plan to invest around SGD9 billion in non-gaming attractions at their integrated resorts in Singapore, which comes with an extension on their exclusive gaming licenses until 2030. Singapore's Ministry of Trade and Industry has stated that the additional investment by both companies is almost two-thirds of their initial amount of SGD15 billion in 2006.

Fitch thinks the development is neutral to Genting's credit profile. Genting's leverage will be higher than our previous expectations and the gaming tax in Singapore will increase in 2022 by about 3%. However, Fitch believes that Genting has the liquidity, leverage and free cash flow capacity to fund the development within its current rating. We continue to believe the company has deleveraging capacity once Resorts World Las Vegas opens by end-2020, returning its leverage to around 1.0x, which is commensurate with its 'A-' Issuer Default Rating. Fitch believes that GENS will also maintain a stable dividend payout of around SGD3.5 cent per share during the period of high capex such that cash flows at Genting Overseas Holdings Limited (A-/Stable), will not be impaired. GOHL is Genting's 100% owned subsidiary, which effectively holds 52.7% of GENS.

Foreigners comprise a larger share of GENS's gaming revenue, and Fitch estimates that once in effect, the casino tax and casino entry levy will reduce GENS's EBITDA by around 5%. However, we expect the incremental revenue from the Singapore development to roughly offset the higher tax structure and the higher entrance fees planned for Singaporeans and permanent residents. We believe GENS gains a greater presence with the longer exclusivity in Singapore, a deep gaming market that draws visitors from the south-east Asian region and benefits from an existing, well-developed tourism infrastructure. Fitch believes the redevelopment will help boost Singapore's visitor arrivals, which have been increasing at a slower pace in the last five years amid growing competition from other tourist destinations in Asia. Genting will also benefit from its diversification into the US and potentially Japan, which will compensate for the higher leverage, in our view.

The development agreement for GENS requires the total investment of SGD4.5 billion within five years and entitles GENS to an option to expand its gaming area by 500sq m from its existing approved gaming area of 15,000sq m and an additional 800 gaming machines over its existing 2,500 machines. The agreement will also allow the company to expand the resort's total gross floor area by about 50%. The company plans to enlarge its theme park and aquarium and add two new hotels (1,100 rooms). The SGD4.5 billion development of Marina Bay Sands, the other casino in Singapore, includes expanding its gaming space and a new hotel tower (1,000 rooms).

We had factored in SGD800 million of discretionary capex per year from 2021-2022 when we affirmed Genting's ratings in November 2018 to account for potential new investments due to the capital-intensive nature of the business. After adjusting our forecasts following the redevelopment announcement, we expect Genting's leverage to increase by around 0.5x, and to peak in 2020 at around 2.0x from our previous forecast of 1.6x. 

Genting has also been able to time its capex to broadly match its operating cash flows, which helps the company to manage leverage during expansions. The RWS redevelopment was announced at a time when many of Genting's other redevelopments are coming to a close - Genting Malaysia's 10-year redevelopment plan is nearing completion, while the Resorts World Las Vegas construction is at an advanced stage and will meet its completion target by end-2020. 

We have not factored in any additional investment with respect to GENS's intent to bid for the integrated-resort project in Japan in our forecast amid the uncertainty over whether the project will go ahead. Any additional multibillion-dollar investments will likely delay Genting's deleveraging trajectory, and may constrain its ability to deleverage to below 1.0x, the level at which Fitch would consider negative rating action.