Analyst forecasts Studio City’s position in the Macau Market

A global report on the casino industry produced this month by the credit ratings house has suggested that Macau casino resort Studio City may be “likely to fail” its first financial tests concerning its borrowings relative to its earnings.

The analysis in the report has been provided by Fitch Ratings Inc. Alex Bumazhny, Fitch’s Senior Director for Gaming, Lodging and Leisure said: “At current run rate, Studio City is on track to generate US$100 million of EBITDA (earnings before interest, taxation, depreciation and amortisation) and burn about US$85 million in cash per year; and is likely to fail its first leveraged based financial tests.”

Studio City opened in 2015 at a cost of US$3.2 billion and without any VIP gaming rooms. It was given an allocation of 250 new-to-market tables under the Macau government’s table cap.

The report adds that Asian casino developer Melco Crown Entertainment Ltd, led by entrepreneur Lawrence Ho Yau Lung (who own 60 percent of Studio City) may seek to increase equity holding in the project.

Mr Bumazhny said: “Studio City has up to two equity cures but the cures are capped at 30 percent of EBITDA or cash flow needed [in order] to be in compliance with the respective covenant (about US$70 million for the first total leverage test), which may not be enough.”

He continued: “While there are many plausible scenarios, Fitch believes that more likely outcome is MPEL (Melco Crown) increasing its stake in Studio City. New Cotai (LLC), a 40 percent equity owner in Studio City with US$628 million of debt outstanding, is unlikely to contribute pro rata equity to bail out Studio City. In an event of a default at either new Cotai or Studio City, MPEL would be a logical, strategic bidder for the equity issued to the creditors in question. Studio City’s performance would likely be optimised if it were wholly owned by MPEL due to the greater flexibility in marketing and table allocation.”