Refinancing Risk prompts Moody's to Review NagaCorp's B2 Ratings for Downgrade

NagaWorld has to show some progress in the next three months to refinance its $472 million bond which is due in July 2024, failing which its ratings could be downgraded
NagaWorld in Phnom Penh. Kiripost/Siv Channa
NagaWorld in Phnom Penh. Kiripost/Siv Channa

Hong Kong-listed NagaCorp Ltd’s B2 corporate family rating (CFR) and the B2 senior unsecured rating on the company's US dollar bond has been placed “on review for downgrade” by Moody’s Investors Service Inc.

The bond is unconditionally and irrevocably guaranteed by the major operating subsidiaries of NagaCorp, Moody’s stated last Thursday, noting that the company’s outlook has also been changed to “ratings under review” from negative.

"The ratings review reflects the likelihood of a downgrade if NagaCorp fails to make substantial progress over the next three months to refinance its outstanding $472 million bond coming due in July 2024," says Yu Sheng Tay, a Moody's Analyst.

NagaCorp Ltd, which owns exclusive rights to operate NagaWorld, Phnom Penh’s only integrated casino and hotel complex within a 200 kilometre radius, is apparently undergoing tight funding conditions.

The bond is the company's only debt in its capital structure, excluding lease liabilities, it said, adding that NagaCorp has limited sources of liquidity owing to its lack of bank facilities and divestible non-core assets.

Over the next two years, Moody’s expects NagaCorp's earnings to improve as Cambodia's tourism sector continues to recover and benefit from the return of tourists from China.

Based on that, NagaCorp’s earnings before interest, tax, depreciation and amortisation is estimated to be around $370 million in 2023 and $485 million in 2024, compared with $245 million last year. “Such levels remain below its earnings in 2019.”

The company returned to the black in its financial year ended December 31, 2022 with $107.2 million net profit following a $147.02 million net loss in 2021, as revenue surged 104 percent to $460.7 million. Gross gaming revenue (GGR) rose nearly 100 percent at $445.9 million from $223.5 million.

The results were attributed to the growth in GGR in its mass market segment where mass market tables GGR stood at $203.8 million in FY22 compared to $66.5 million last year.

However, Moody’s said, despite the earnings improvement, NagaCorp will “likely rely on external financing to repay its bond”.

As of December 31, the company had cash and deposits of $175 million. “Together with expected operating cash flows of around $535 million through to June 2024, this is inadequate to cover the company's cash uses, which include the bond maturity and discretionary spending such as dividends and development capital expenditure,” it stated.

NagaCorp has the flexibility to significantly reduce or defer its discretionary spending to shore up liquidity and repay the bond through internal cash flows.

“Nonetheless, Moody's expects the company to continue incurring capital expenditure for its Naga 3 development project at this juncture, having outlined its construction targets for the year,” it said.

In the meantime, Moody’s viewed NagaCorp's declaration of scrip dividends in lieu of cash in 2022 as credit positive, although it has not made any public commitments on whether it would maintain scrip dividends or revert to cash in 2023. (Scrip dividends are additional shares issued to shareholders instead of dividends).

Against this backdrop, former NagaWorld’s workers continue to strike in front of the casino, seeking justice over the alleged discriminatory termination of more than 1,300 staff in 2021.

The ongoing protest has seen the arrests of several leaders of the Labor Rights Supported Union of Khmer Employees of NagaWorld including its president Chhim Sithar, who is currently facing trial.

NagaCorp was founded by Malaysian Chen Lip Keong in 2003, who is its CEO and largest shareholder with a 69 percent stake, as of December 31, 2022.

Going forward, Moody's review will focus on NagaCorp's ability to address its bond maturity over the next three months.

A downgrade is possible if NagaCorp is not able to address its refinancing risk or undertakes a liability management exercise that Moody's views to be an avoidance of default that results in economic loss for its bondholders.

“An upgrade of NagaCorp's ratings is unlikely, given the review for downgrade. However, Moody's could confirm the ratings if the company addresses its refinancing risk,” it said.