The corporate family rating and senior unsecured rating of NagaCorp Ltd’s US dollar bond have been downgraded to B3 from B2 and with a negative outlook from “ratings under review” by credit rating agency Moody’s Investors Service Inc.
The bond is unconditionally and irrevocably guaranteed by the major operating subsidiaries of NagaCorp, a Hong Kong-listed firm that operates Phnom Penh’s sole integrated casino and hotel NagaWorld.
A corporate family rating is an opinion of a corporate family’s ability to honour all of its financial obligations, the agency previously mentioned.
According to Moody's analyst Tay YuSheng, the rating downgrade and negative outlook reflect NagaCorp's lack of refinancing progress for its $472 million US bond coming due in July 2024.
“The bond forms all of the company's debt in its capital structure," he said in a note to investors today.
He added that despite NagaCorp having reduced its discretionary spending, its ability to repay the bond depends on the pace of earnings recovery, which currently remains uncertain.
Scrip dividends
Justifying the rationale, Moody's explained that there is “increased likelihood” of a distressed exchange as funding conditions for Asian high-yield companies remain tight. “At the same time, NagaCorp has limited liquidity sources, given its lack of bank facilities and divestible non-core assets.”
NagaCorp's discretionary spending would reduce over the next 18 months, noting that on June 4, the company announced it has extended the completion date for its expansion project, Naga 3, by four years to September 2029.
Consequently, Moody's expects NagaCorp to spend less than $50 million on development capital expenditure in 2023, compared with the company's previous guidance of $100 million to $125 million.
“[We] also understand that NagaCorp will likely pay scrip dividends (new shares) in lieu of cash until it addresses its bond maturity. The company has not paid any cash dividends since 2021,” Moody’s said.
That said, Moody's views NagaCorp's reduction in discretionary spending as credit positive. However, the company's ability to generate sufficient free cash flow to repay the bond depends on the pace of earnings recovery, which currently remains uncertain.
Lower win rates
NagaCorp's earnings will likely improve over the next 18 months as Cambodia's tourism sector continues to recover and benefit from the return of Chinese tourists. Moody's opined that NagaCorp could generate earnings before interest, taxes, depreciation and amortisation (EBITDA) of $350 million to $370 million in 2023, and $485 million in 2024.
But, a “slower-than-expected” recovery could pressure NagaCorp's liquidity, it said, adding that in the first quarter of 2023, the company generated “just $59 million of EBITDA” because of lower win rates and rising staff costs.
Moody’s shared that NagaCorp's B3 corporate family rating “continues to reflect the dominant position” of its integrated casino and hotel complex, which is underpinned by exclusive rights until 2045 to operate casinos in and around the capital city.
“However, the ratings are constrained by the company's single-site operations, as well as exposure to political risk and Cambodia's evolving regulatory framework,” it added.
A possible upgrade, downgrade?
Moody’s said given the negative outlook, an upgrade is unlikely over the next 12 to 18 months, although the outlook could “return to stable” if NagaCorp addresses its refinancing risk.
NagaCorp could experience ratings downgrade if the company is unable to address its refinancing risk or undertakes a liability management exercise that Moody's views to be an avoidance of default and which results in economic loss for its bondholders.
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