Moody’s Investors Service has downgraded NagaCorp Ltd.’s corporate family rating (CFR) and senior unsecured rating on the company’s US dollar bond. Moody’s has also changed its outlook to negative from ratings under review.
In a Monday note, Moody’s said the action concludes the review for the downgrade initiated on 2 March 2023.
“The rating downgrade and negative outlook reflect NagaCorp‘s lack of refinancing progress for its $472 million US dollar bond coming due in July 2024. The bond forms all of the company’s debt in its capital structure,” says YuSheng Tay, a Moody’s Analyst.
“Despite NagaCorp having reduced its discretionary spending, its ability to repay the bond depends on the pace of earnings recovery, which currently remains uncertain,” adds Tay.
The rating agency noted that there is increased likelihood of a distressed exchange as funding conditions for Asian high-yield companies remain tight. “NagaCorp has limited liquidity sources, given its lack of bank facilities and divestible non-core assets.”
NagaCorp‘s discretionary spending will reduce over the next 18 months. The company announced early this month that it has extended the completion date for its expansion project, Naga 3, by four years to September 2029.
Consequently, Moody’s expects NagaCorp to spend less than $50 million on development capital expenditure in 2023, compared with the company’s previous guidance of $100 million-$125 million.
“NagaCorp will likely pay scrip dividends in lieu of cash until it addresses its bond maturity. The company has not paid any cash dividends since 2021”, the agency said.
Moody’s views NagaCorp’s reduction in discretionary spending as credit positive. However, “the company’s ability to generate sufficient free cash flow to repay the bond depends on the pace of earnings recovery, which currently remains uncertain.”
“NagaCorp’s earnings will likely improve over the next 18 months as Cambodia’s tourism sector continues to recover and benefit from the return of Chinese tourists.”
Moody’s assumes that the company could generate EBITDA of around $350 million-$370 million in 2023 and $485 million in 2024; however, a slower-than-expected recovery could pressure NagaCorp’s liquidity.
In 1Q23, the company generated just $59 million of EBITDA because of lower win rates and rising staff costs.
The agency also noted that NagaCorp continues to secure the dominant position of its integrated casino and hotel complex, NagaWorld, in Phnom Penh, Cambodia, which is underpinned by exclusive rights until 2045 to operate casinos in and around the capital city. However, “the ratings are constrained by the company’s single-site operations as well as exposure to political risk and Cambodia’s evolving regulatory framework.”