NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns a 'BBB-' to the Wynn Resorts (Macau), S.A. (Wynn Macau) proposed $1.5 billion senior secured credit facility. Fitch also affirms the following ratings IDRs for the entities listed below:
Wynn Resorts (Macau), S.A. (Wynn Macau),
--Long-term IDR at 'BB';
Wynn Las Vegas LLC (Wynn Las Vegas), and
--Long-term IDR at 'BB';
--Credit facility at 'BB+';
--First mortgage notes at 'BB+'.
Wynn Resorts, Ltd (Wynn Resorts; collectively Wynn).
--Long-term IDR at 'BB';
--Outstanding credit facility at 'BBB-'.
The Rating Outlook is Stable.
The Macau facility will consist of a $1 billion revolver maturing 2018 and a $500 million term loan also maturing in 2018 ($250 million will be due in 2017). There will also be a $1 billion accordion option. Proceeds will be used to partially fund Wynn's Cotai project, which is budgeted at $3.5 billion - $4.0 billion, and to refinance $440 million outstanding (as of March 31, 2012) on the Wynn Macau's existing credit facility.
The ratings take into account the increase in the cost estimate for the Cotai project, which could open by early 2016. The company's previous preliminary guidance for the project cost was up to $3 billion. Wynn Macau is currently generating annual discretionary free cash flow (FCF) of roughly $1 billion. Fitch calculates Wynn Macau has excess cash (net of cage/operational cash) of more than $400 million. As a result, Wynn Macau maintains significant financial flexibility and has the ability to largely fund the project with internally generated funds. However, that is not Fitch's expectation.
Macau Credit Facility Rating
The 'BBB-' rating assigned to the proposed Macau credit facility incorporates Fitch's view that the secured facility is well overcollateralized. This is supported by modest leverage expectations through the development, limitations on secured debt issuance, an attractive supply/demand outlook over the next few years, and high barriers to entry in the market. The proposed facility covenants will largely limit total potential secured debt to the credit facility capacity of $2.5 billion, including the $1 billion accordion option.
The 'BBB-' rating currently incorporates Wynn Macau's sufficient financial flexibility to fund the project. There is also tolerance within the rating for the accordion to be funded. Additional potential secured debt meaningfully beyond $2.5 billion could pressure the rating.
The Macau credit facility's two-notch rating differential relative to the 'BB' IDR reflects Fitch's soft cap for Macau based issuers and the rating cap of 'BBB-' for secured debt instruments of issuers with IDRs in the 'BB' category (see the criteria reports referenced below).
Prospective lenders should note Clause 12 of the Cotai land concession contract (filed on May 12, 2012 as an 8-K). The clause stipulates that the mortgage on leasing rights of the Cotai land could only be granted to institutions with head offices or branches in Macau. The land concession contract for the Peninsula parcel does not have this requirement.
IDR and Linkage Considerations
The 'BB' IDR continues to incorporate Wynn's high quality assets and solid market position in attractive markets; historically prudent balance sheet management; solid consolidated financial profile, and rating linkage between the stronger Macau subsidiary and the weaker Las Vegas subsidiary.
As of March 31, 2012, Fitch calculates gross leverage (total debt/EBITDA) of 4.2x on a consolidated basis and adjusted for the Macau minority interest. Fitch views this as a solid figure for the 'BB' IDR given the company's business risks. Fitch's current base case reflects consolidated gross leverage peaking in the mid-5x range through the Cotai development.
The rating linkage is supported by Wynn's ability and demonstrated willingness to upstream funds from Wynn Macau to the parent as well as Wynn Las Vegas' strategic importance to Wynn Macau and the parent. In 2009-2010 Wynn Resorts contributed $463 million to Wynn Las Vegas. Wynn Resorts collects royalty fees from Wynn Macau, which were $156 million in the LTM period ending March 31, 2012 relative to about $20 million of cash based corporate expenses and roughly $40 million of anticipated interest due annually on the $1.9 billion promissory note related to the Okada share redemption.
The new Macau credit facility will permit Wynn Macau to pay dividends as long as the subsidiary is compliant with the net leverage maintenance covenant. This starts at 3.75x, steps-up to 5.00x by 2016 and then starts to step-down in 2017 following the Cotai project opening. Fitch projects ample cushion relative to covenant levels through the Cotai development.
Under a stress scenario in which conditions deteriorate such that intercompany support becomes questionable, Fitch may view the ratings on a standalone basis. Such stress would likely be commensurate with the IDR migrating towards the 'B' category. During the Cotai development cycle, intercompany support has the potential to become more strained. However, Fitch's base case incorporates the Las Vegas entity to be solidly free cash flow positive over the next several years and there are no maturities at the Las Vegas subsidiary until 2017.
Fitch is revising its 2012 base case forecast for Macau revenue growth to 15% from the 20% indicated in Fitch's 2012 Gaming Outlook (published in December 2011). The 15% growth rate incorporates Fitch's more cautious view with respect to the slowdown in China and a slower than expected gaming revenue growth in May of 7.3%. In March, Fitch's sovereign team revised its 2012 GDP forecast for China to 8.0% from 8.2%. YTD gaming revenue growth of 21.4% through May remains slightly above Fitch's initial forecast.
The May slowdown was in part due to a tough comp to May 2011 due to the Golden Week in May 2011 having seven days versus three days in 2012 and a very strong opening of Galaxy Macau in May 2011. Table hold also had an impact. The slowdown was more skewed towards the VIP business, which is believed to be more susceptible to general macro trends in China. However, the VIP slowdown is not being attributed by the Macau gaming operators to credit or liquidity tightening in China.
Fitch expects revenue growth at Wynn Macau to trend below Fitch's 15% growth estimate for the market with some cannibalization expected from the opening of Cotai Central, which partially opened in April with 393 table games (including 156 VIP tables) and 1,860 rooms. Another 200 tables are expected to come online by September 2012.
In Fitch's base case, Wynn Macau's 2012 property level EBITDA is roughly $1.26 billion. Net of management fees and corporate expenses, EBITDA is closer to $1.07 billion. Maintenance capital expenditures are estimated at roughly $65 million. Interest expense could be in the $50 million-$100 million range largely depending on how Wynn funds its Cotai project. This should leave roughly $900 million - $1 billion in FCF to be split between funding the Cotai project and paying dividends.
Longer-term, Fitch believes gaming authorities in the Chinese-administered territory will remain focused on careful management of supply, as the cap on table games through 2013 limits additional capacity beyond Las Vegas Sands Corp.'s Cotai Central. The government has targeted a table growth rate after the cap of 3% annually. The authorities' commitment to manage market growth primarily through supply regulation, as opposed to travel restrictions, is a positive for incumbent gaming operators' profitability, free cash flow generation potential, and credit quality.
Although gaming revenue growth in Macau continues to decelerate from extraordinary levels, new supply additions will be constrained until 2015-2016. Wynn's Cotai property could be the first opening in this next round of market supply growth, but the timing of other potential projects is uncertain at this time.
Las Vegas Outlook
Fitch remains positive on the Las Vegas Strip recovery. In its December outlook report, Fitch forecasted mid-single digit gaming revenue growth for 2012 (up 5.2% YTD through March) and 2% visitation growth (up 3.6% YTD). Increased convention mix and minimal new room supply should bode well for RevPAR growth. The citywide ADR is up 3.6% YTD while occupancy is up 50 basis points to 82.8%.
Wynn Las Vegas'debt/EBITDA gross leverage is at 8.15x taking into account $3.1 billion of debt as of March 31, 2012 and an LTM EBITDA of $380 million (after corporate expense). Pro forma interest expense is approximately $218 million and assuming $60 million for maintenance capex, pro forma FCF is around $100 million. Fitch calculates actual LTM FCF through March 31, 2012 was $157 million.
Wynn Las Vegas' liquidity is solid with approximately $705 million of cash (net of $35 million cage cash estimated by Fitch) and $84 million available on the revolver. There are no maturities until 2017 ($500 million of 7.875% first-mortgage notes). The $100 million undrawn revolver matures in 2015.
The Las Vegas first mortgage notes are notched up by one from the IDR. Fitch limits the notching to +1 due to the high leverage at the subsidiary in excess of 8x, with all of the debt secured. The notes' security is also conditional and could be removed by the issuer if there is no other secured debt at the Las Vegas subsidiary. Following the first mortgage note issuance in March, the only other secured debt in the capital structure is an undrawn $100 million revolver.
Balance Sheet Management and Cash Balances
Management has a demonstrated history of conservative balance sheet management. Since its initial IPO in 2002, Wynn completed five secondary equity issuances from 2004-2009 in the U.S., raising nearly $1.9 billion, while also raising an additional $1.9 billion in its 2009 Hong Kong IPO of its Macau subsidiary.
During the 2008-2009 U.S. recession, Wynn aggressively improved its balance sheet by extending maturities when possible. Wynn maintained solid capital market access, and issued equity without near-term needs. Unlike some other U.S. operators, Wynn maintained a robust liquidity profile and funded projects early in the development cycle (Encore at Wynn Las Vegas opened in Dec. 2008, while Encore at Wynn Macau opened in Apr. 2010).
Fitch believes that in an economic downturn scenario, Wynn Resorts would pull back on the amount of cash it pulls from Wynn Macau through special dividends and management/royalty fees, if needed.
As of March 31, 2012, Fitch calculates that Wynn maintained sizable cash balances of roughly $1.5 billion in excess cash (excluding estimated cage/operation cash), consisting of $386 million at Wynn Resorts, around $700 million at Wynn Las Vegas and roughly $430 million at Wynn Macau.
Drivers of Future Rating Actions
An upgrade of the 'BB' linked IDR is unlikely over the near-term, due to the following primary factors:
--Increased budget of the Cotai project;
--Okada dispute overhang;
--Development risk of the Cotai project (GMP contract is not yet completed)
--Uncertain timing of competitive supply growth in Macau;
--Uncertain impact of developing gaming markets including Vietnam and the Philippines;
--Potential for increased regional market competition over the medium-term, including Japan, South Korea, and Taiwan, and/or
--Still-fragile state of the U.S. economic recovery.
The following rating drivers can potentially place negative pressure on the ratings and/or Outlook:
--A significant economic dislocation in China caused by a real estate correction and/or credit market disruptions;
--Wynn developing another project in conjunction with Cotai. Fitch believes that Wynn would be interested to develop in Florida, Japan or Taiwan if any of these jurisdictions approve large scale casino resorts;
--Chinese government enforces stricter restrictions on visitation to Macau by the Chinese nationals, or takes other measures to slow growth;
--U.S. economic recovery stalls or begins to point to a double-dip recession, although that scenario is not currently in Fitch's base case, and/or
--Greater than expected shareholder friendly actions.
If one or more of these drivers were to materialize, Fitch believes that Wynn's IDR and credit profile has the ability to remain firmly in the 'BB' category. Current consolidated gross leverage (4.2x based on LTM EBITDA net of minority interest expense) and coverage levels (in the 4.0x-5.0x range on pro forma basis) are solid for the 'BB' IDR relative to Wynn's business risks. Fitch forecasts that the company can maintain solid credit protection measures and ample liquidity through the Cotai development.
With respect to the Macau credit facility rating, the following factors could pressure the ratings:
--A significant increase in the projected potential secured debt levels,
--If any of the Asia-specific rating factors noted above result in a greater-than-expected adverse impact to the value of Wynn Macau's assets,
--If the 'BB' IDR was downgraded, Fitch would likely downgrade the Macau credit facility rating accordingly.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Fitch Rates Wynn's First Mortgage Notes due 2022 'BB+'; Outlook Stable' (Mar. 5, 2012)
--'Fitch Affirms Wynn's IDR at 'BB'; Outlook Revised to Stable Following Shareholder Dispute' (Feb. 22, 2012);
--'Wynn Resorts, Ltd' Full Rating Report (Sept. 12, 2011);
--'2012 Outlook: Gaming - Market Exposure the Differentiating Factor' (Dec. 13, 2011);
--'Evaluating Corporate Governance' (Dec. 13, 2011);
--'Corporate Rating Methodology' (Aug. 12, 2011);
--'Parent and Subsidiary Rating Linkage: Fitch's Approach to Rating Entities Within a Corporate Group Structure' (Aug. 12, 2011);
--'Recovery Ratings and Notching Criteria for Non-financial Corporate Issuers' (May 3, 2012);
--'Country-Specific Treatment of Recovery Ratings' (Feb. 23, 2012).
Applicable Criteria and Related Research:
2012 Outlook: Gaming -- Market Exposure the Differentiating Factor
Evaluating Corporate Governance
Corporate Rating Methodology
Parent and Subsidiary Rating Linkage
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers
Country-Specific Treatment of Recovery Ratings
Wynn Resorts, Ltd.