Shutdowns of SkyCity Entertainment Group's New Zealand and Australian casino operations are causing concerns, particularly at its powerhouse Auckland property.
Melbourne's S&P Global Ratings has just put the Auckland-headquartered company on creditwatch due to the damage closures could cause to the business.
"We believe government-led casino closures will generate negative cash flows at SkyCity's New Zealand and Australian assets," S&P said. "The extent and duration of the casino closures are uncertain, and so too, is the rate of earnings recovery following the closure period. Skycity has significant earnings concentration at its highest quality asset, the Auckland casino, which comprises more than 70 per cent of group earnings."
Liza McNally, SkyCity chief marketing officer said today: "While it is a sad day for us and most other businesses in New Zealand, we do believe closing our properties is right thing to do for the country and for our people. We look forward to the day the Government advises we can responsibly re-open."
Recent market announcements gave further details, she said.
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S&P said prolonged casino and operational closures could compromise the group's ability to maintain leverage in line with its BBB- rating. The business has hotels, restaurants and bars as well as the casino businesses.
SkyCity's property expansion and development work, worth about $1.05b, gave S&P little comfort. SkyCity has yet to finish the fire-damaged $702 million NZ International Convention Centre in Auckland and the A$330m Adelaide expansion.
"The group is undertaking significant development activity across its Adelaide development and rebuild of the NZICC. The concurrence of Covid-19 is likely to test the company's capital allocation framework, including its ability to maintain adjusted debt to EBITDA below 3 [times]," S&P said.
SkyCity employs about 4000 people in New Zealand and about 1000 at its riverside location in a historic Adelaide railway station.
"In our view, the group has a solid track record of prudent balance sheet management and ratings stability," S&P said.
The company was publicly committed to maintaining its current BBB- rating "which we believe implies that it will take all reasonable actions to protect the interests of creditors. Levers to support balance sheet health include recalibrating shareholder returns, non-core assets sales, as well as near-term operating and capital expenditure decisions. The company has previously raised equity to support its balance sheet," S&P said.
On Monday, SkyCity issued an NZX statement saying it was preparing to shut New Zealand properties although at that point, only the Adelaide property was due to shut.
"We respect the Australian Government's decision to close the Adelaide Casino in order to combat the spread of Covid-19," chief executive Graeme Stephens said on Monday. Auckland, Hamilton and Queenstown were open then.
But by tonight at 11.59pm, when New Zealand moves to Covid-19 Alert Level 4, all SkyCity operations must close.
"SkyCity is preparing for the potential closure of its New Zealand properties should the Government raise the Covid-19 alert level. We are working through what the implications may be for our 4000 employees in New Zealand," Stephens said on Monday.
S&P Ratings said that as the situation evolved, the group's liquidity and covenant compliance will be key. The group has $337m in undrawn bank facilities and is expecting a cash inflow of about $85m from insurance payments next month to cover certain capital expenditure requirements.
"We believe the group is committed to completing its major development projects underway, but has a greater level of flexibility on future projects and some flexibility with maintenance capital expenditure," said S&P.
SkyCity's next debt maturity comprises $50m of drawn syndicated bank debt due on June 30, 2020, followed by a hedged US$100m US private placement note due in March next year, S&P said.
"The CreditWatch negative placement reflects our view that operational closures across SkyCity's key casino assets, together with the funding of significant capital expenditure, may cause SkyCity's adjusted debt-to-EBITDA to materially exceed 3.0x over the next one to two years," it said.
Operational and capital management initiatives over the next 90 days will be monitored to ascertain whether the company's efforts to reduce costs will be sufficient to offset the challenging and evolving operating environment and support an adequate liquidity profile.
"We could lower the rating if operational closures are prolonged such that we forecast adjusted debt to EBITDA to sustain above 3.0x over the next one to two years. Based on our current expectations regarding the likely timing and impact of the casino closures, we do not expect a downgrade, if any, to exceed one notch," S&P said.