Melco Crown (Macau) And Studio City Ratings Placed On CreditWatch Negative Following Parent#s Debt-Funded Share Purchase

Stocks and Financial Services Press Releases Monday December 19, 2016 17:22
HONG KONG--19 Dec--S&P Global Ratings

HONG KONG (S&P Global Ratings) Dec. 19, 2016--S&P Global Ratings said today that it had placed its 'BB' long-term corporate credit rating and 'cnBBB-' long-term Greater China regional scale rating on Melco Crown (Macau) Ltd. (Melco Crown) on CreditWatch with negative implications. We also placed our 'BB-' long-term issue rating and 'cnBB+' long-term Greater China regional scale rating on the senior unsecured notes that MCE Finance Ltd. issued on CreditWatch with negative implications. Melco Crown guarantees the notes.

At the same time, we placed our 'BB-' long-term corporate credit rating on Studio City Co. Ltd., our 'BB-' long-term issue rating on the company's senior secured notes, and our 'B' long-term issue rating on the senior unsecured notes that Studio City guarantees on CreditWatch with negative implications. We also placed our 'cnBB+' long-term Greater China regional scale rating on Studio City and its senior secured notes, and the 'cnBB-' rating on the senior unsecured notes on CreditWatch with negative implications.

"We placed the ratings on Melco Crown on CreditWatch after the company's ultimate parent Melco International Development Ltd. agreed to purchase 13.4% of the issued shares of Melco Crown Entertainment Ltd. (MCE) for about US$1.2 billion," said S&P Global Ratings credit analyst Sophie Lin.

"The share purchase will likely be debt funded, and we expect that it could significantly increase Melco International's debt leverage and weaken its consolidated credit metrics. Melco International's refinancing plan for the debt-funded share purchase and its financial policy for the group and its subsidiaries are unclear to us."

After the share purchase, Melco International's stake in MCE will rise to 51.3% from 37.9% and its number of directors on MCE's board will increase to four from three.

A deterioration in the credit profile of Melco International will likely constrain the ratings on Melco Crown. That's because Melco International could have control over Melco Crown's strategy and cash flow via MCE. MCE is the group's core and most important cash-generating subsidiary. Melco International is the parent of MCE, and the ultimate parent of Melco Crown and Studio City, the rated entities.

We estimate that Melco International group's ratio of adjusted debt to EBITDA will increase to 4.0x-5.0x following the debt-funded share purchase, from 3.0x-4.0x as of June 30, 2016. This estimate assumes Melco International's consolidation of MCE from the beginning of the year.

A deterioration in Melco Crown's creditworthiness will also pressure our rating on Studio City, in which MCE owns 60%. The rating on Studio City is three notches higher than its stand-alone credit profile (SACP), reflecting our anticipation of extraordinary group support from MCE. We do not expect any material change in Studio City's SACP from the proposed transaction.

"We aim to resolve the CreditWatch within the next three months once we have more information to assess Melco International's credit profile, its financial policy, and its control over the cash flow and strategy of its key

subsidiaries," said Ms. Lin.

We could lower our ratings on Melco Crown if we believe that MCE's credit profile is not severable from Melco International's, and that the group's consolidated credit profile will weaken due to the share purchase.

We could affirm the ratings on Melco Crown if we believe that Melco International does not have control over MCE's cash flow and strategy, or MCE's financial performance and debt payment capability are highly independent of Melco International. We could also affirm the ratings on Melco Crown if we assessed that the group's credit profile will not weaken following the share acquisition.

We could affirm or lower our rating on Studio City if we take the same action on Melco Crown.

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