S&P Global Ratings, an American credit rating agency, may soon downgrade the credit of Melco Resorts & Entertainment and its Studio City. The reason for this is S&P’s doubts that Macau, a key region for Melco’s business, will recover from the pandemic anytime soon.
S&P commented that Melco’s mass GGR is experiencing a slow recovery because of the COVID-19 pandemic. The agency forecasts that the operator’s declining revenues will cause a greater cash burn and higher leverage by the end of the year. S&P also noted that Melco’s leverage levels are unlikely to decline before 2024. Fortunately, any credit downgrade will likely be limited to no more than a notch.
Macau’s Woes Will Trouble Melco’s Business
The agency explained that the reason Melco will recover slowly is because of the current situation in Macau. Macau is the operator’s core market and was singlehandedly responsible for 85% of its 2019 EBITDA. However, that very same market is now struggling with the harmful effects of COVID-19 and China’s restrictive zero-COVID policy.
As a result, Macau’s overall GGR has been declining for months, with no relief on the horizon. The recent COVID-19 outbreak in Macau worsened the special administrative region’s woes. According to S&P’s forecasts, Macau will reach only 20-30% of its 2019 revenues this year. Although analysts expect the region to recover to pre-pandemic levels, this is unlikely to happen before 2024.
The silver lining of Melco’s situation is that its business in the Philippines will likely mitigate some of the damages. Analysts predict that the island country is poised to become one of the top markets on the continent.
COVID Is One of the Greatest Challenges the Industry Has Faced
Right now COVID is a chaos factor that makes it difficult to make certain predictions. Many expect the situation in China to calm down but this outcome remains uncertain. Realistically, the best-case scenario for the gaming industry would be if China adapts to live with the virus. Some believe that this will eventually happen as the Asian country recently eased up certain restrictions concerning inbound arrivals.
S&P said that it would now focus on following how Melco deals with its leverage level and whether it is able to reduce it. The agency said that it will be following the situation and will keep updating its projections accordingly.
A statement by the ratings firm confirmed that it will keep on assessing the situation. S&P vowed to continue considering any new information, including changes in China’s policies and how the country manages travel between mainland China and the special administrative region.