Melco Resorts, City of Dreams

Melco Resorts & Entertainment’s 2022 EBITDA is only likely to reach 4 to 5 percent of 2019 levels and the uncertainty over recovery in Macau is weighing on its credit rating, Moody’s Investor Services said. 

This is likely to improve to 70 percent of 2019 levels in 2023 and 95 percent the following year. However, the firm said it expects margins to be better than pre-pandemic levels due to a higher proportion of more profitable mass-market business in its revenue mix.

Melco posted an adjusted EBITDA of $165 million in 2021, swinging from a loss of $177 million in 2020. In 2019, it posted EBITDA of $1.6 billion. 

“MRE’s credit quality is constrained by the prolonged weak operating environment amid coronavirus pandemic-related restrictions in China, and the uncertainty around the timing of the eventual recovery of Macao’s gaming market,” it said.

The company will likely finance the majority of its capital expenditure with additional debt. Moody’s says as a result, leverage will rise to 7.3x next year before coming back to 4.8x in 2024, which would still be higher than 3.3x in 2019.

Moody’s has a Ba3 long-term family rating on Melco, with a negative outlook.

It said the debt levels are commensurate with the ratings category, however, the negative outlook is due to the uncertain pace and recovery in Macau. 

Macau’s operators have all seen a spike in debt and leverage levels as they continue to struggle with hugely reduced revenue. Morgan Stanley recently estimated that the six companies will have combined leverage of $25 billion by the end of this year, five times higher than the end of 2019.

Moody’s estimates Macau’s mass-market gaming revenue will be about 40 percent of pre-Covid levels this year, before improving to 80 percent in 2023.

“We now expect a full recovery in Macau’s mass-market GGR only in 2024,” it said in a credit opinion. “Macau’s VIP revenue is unlikely to recover significantly because of junket closures, although this situation will have limited impact on Melco’s earnings because of the VIP segment’s low earnings contribution,” which was less than 10 percent of EBITDA in 2019. 

Moody’s is more upbeat on the company’s operation in the Philippines, where it runs City of Dreams Manila, but still doesn’t see a full recovery until 2024 when Chinese tourists return.