Fitch Affirms Wynn Resorts' IDR at 'BB'; Stable Outlook
OREANDA-NEWS. Fitch Ratings has affirmed the Issuer Default Ratings (IDRs) of Wynn Resorts, Ltd (WYNN) and all of its subsidiaries rated by Fitch at 'BB'. The Rating Outlook is Stable. The subsidiaries affirmed include Wynn Las Vegas, LLC (Wynn Las Vegas), Wynn America, LLC (Wynn America), Wynn Macau, Ltd (Wynn Macau) and Wynn Resorts (Macau), S.A. Fitch links all of the IDRs within the WYNN corporate structure. The full list of rating actions is at the end of this release.
KEY RATING DRIVERS
Fitch's affirmation of WYNN and the Stable Outlook reflect our view that WYNN has a relatively clear glide path to reduce leverage to levels more commensurate with its 'BB' IDR by 2019, by which time Wynn Palace will be ramped up and Wynn Boston Harbor will be open a full year. Fitch forecasts 2019 consolidated gross and net leverage at 6.0x and 4.5x, respectively, declining further to 5.6x and 3.9x by 2020. Fitch's forecast leverage metrics are solid for 'BB' IDR taking into account WYNN's more diversified market exposure after the project completions and the exceptional asset and brand quality of its asset portfolio. In the interim, leverage will be high (net leverage above 6x) and there is minimal cushion in the credit profile to absorb further operating deterioration or WYNN ramping up shareholder-friendly activity.
Fitch will focus more on WYNN's net leverage as opposed to gross leverage through the development of Wynn Boston Harbor. Since first quarter 2015 (1Q15), WYNN maintained $1 billion or more cash at the parent level (a partly debt-funded distribution from Wynn Las Vegas helped establish the cash cushion). Parent cash was $1.2 billion as of March 31, 2016, an increase from $1 billion at March 31, 2015 with the increase coinciding with WYNN's reduction of its parent-level dividends by about $400 million per year in response to the weakness in Macau. Fitch recognizes the risk that WYNN may use the parent cash to ramp up shareholder-friendly initiatives but, nevertheless, expects cash at the parent level to remain high by historical standards (parent cash on average was around $500 million 2006-2014).
Fitch's leverage forecasts assume modest increases in the parent level dividends, minimal debt repayment and $2.9 billion of cash at the parent level by year-end 2020. Absent better than expected operating performance, Fitch gaining greater clarity with respect to the utilization of cash will be key to maintaining WYNN's IDR at 'BB'. A prioritization of cash for debt reduction and/or as a liquidity buffer will be consistent with the 'BB' IDR. Conversely, cash depletion (or additional borrowing) related to share repurchases, special dividends or the company taking on large-scale projects could pressure the IDR.
The affirmation also takes into account WYNN's history of taking bold measures to shore up its balance sheet. Besides WYNN's recent dividend cut, other notable actions include selling over $2 billion in equity through secondary offerings since its 2002 IPO, including two issuances during the bottom of the last recession, and passing on Singapore in order to focus on its developments in Macau and Las Vegas.
Fitch is positive on WYNN's existing development pipeline, which helps to support Fitch's affirmation of the 'BB' IDR. Once complete, the projects will provide for an operating mix more comparable to WYNN's global gaming peers including Genting Berhad ('A-' IDR), MGM Resorts ('BB' IDR), and Las Vegas Sands ('BBB-' IDR). Fitch's positive view on the development pipeline does not take into account Wynn Paradise Park, which is yet to be approved by WYNN's board.
Wynn Boston Harbor will provide WYNN with diversification away from Macau and Las Vegas and a near monopoly in a gateway metropolitan area. Fitch estimates that Wynn Boston Harbor will make up 15% of WYNN's property EBITDA by 2019. It will be the closest casino to the city of Boston, five miles from the Logan International Airport, with the next-closest casinos about 40 miles south. Penn National's slots-only Plainridge Park Casino opened in 2015 and Mashpee Wampanoag Tribe's First Light Resort & Casino started construction in April 2016 and is backed by Genting Berhad.
The First Light casino will benefit from a 15% gaming tax compared to WYNN's 25%, which will provide First Light with a cost advantage to market more aggressively to more distant and/or less valuable customers. Fitch's $315 million EBITDA forecast for Wynn Boston Harbor assumes Wynn's market share at 20%-60% in the counties closest to First Light and Plainridge and 85%-90% in counties west and north of Boston. Fitch's forecast does not give Wynn Boston Harbor any credit for international business that the casino could capture, considering the proximity to Logan and WYNN's global marketing outreach.
Fitch believes that the $4.2 billion Wynn Palace will outperform other casino developments on Cotai. Fitch attributes $370 million of incremental EBITDA to Wynn Palace relative to the $100 million - $200 million Fitch attributes to competitors' Macau projects. Fitch's stronger confidence in Wynn Palace takes into account WYNN's ability to transfer underutilized resources to Cotai from Peninsula including approximately 50 tables and $100 million of annualized labor costs. Fitch also factors in Wynn Macau's relatively healthy mass market utilization statistics thoughout the recent downturn. Wynn Macau's RevPAR is only 7% lower relative to the peak level attained in 1H14 and remains high relative to other Macau operators at $307 as of 1Q16. Mass market win per table per day declined by 38% during this time, which is decent considering the number of mass table games at Wynn Macau increased by 28% and market-wide mass market revenues declined by about 30%.
Fitch's forecast assumes that WYNN's Macau gaming revenue market share increases to about 13% by 2018 compared to 10% in 2010 and that Macau's market-wide gaming revenue will decline by 5% in 2016 and will grow 6% thereafter. Fitch's Macau forecast is conservative relative to WYNN's middle-case scenario estimate discussed at April's investor day of approximately $650 million in incremental EBITDA.
In April 2016, the company increased its share buyback authorization by $420 million to $1 billion and announced its Wynn Paradise Park concept. While no firm commitment exists for either initiative, both are viewed as potential sources of credit risk by Fitch. Absent stronger than expected operating performance in Las Vegas or Macau (most notably as it relates to the Wynn Palace opening), large-scale repurchases could put pressure on WYNN's IDR, since Fitch views WYNN's significant parent-level cash position as being a critical buttress for the 'BB' IDR.
Buybacks would be a departure from using special dividends as an opportunistic method of returning value to shareholders. On their 1Q16 call, management said the purpose of the larger authorization was to increase flexibility to buy back stock if the company though it was 'grossly over-sold'.
Wynn Paradise Park is an expansion of Wynn Las Vegas. The project is yet to be approved by Wynn's board but management stated that the cost could be around $1.5 billion. Wynn Paradise Park may include a 1,000-room hotel tower and a recreational lake built where the golf course currently stands. The company's management hopes to present the project at a July board meeting and no details were provided as to the financing or timing.
WYNN proceeding with the project in the near term (i.e. 2016 or early 2017) would be viewed negatively by Fitch given the company's thin cushion in the credit profile relative to the 'BB' IDR to absorb another major project developed parallel with Wynn Boston Harbor. Further, Wynn Paradise Park's opening may coincide with 4,200 rooms potentially coming online across the street when Genting's Resorts World Las Vegas and Crown's Alon open around 2019 (no official opening time has been announced for either project). If WYNN proceeds with Wynn Paradise Park, Fitch will consider the project's timing, cost, and the return on investment (ROI) prospects before considering rating action.
An older risk is Kazuo Okada's lawsuit against WYNN related to the 2012 redemption of Okada's shares. The par amount of the promissory note Okada received for his shares is $830 million below the market value of the redeemed shares. Related to the Okada suit, which remains in the discovery phase, the U.S. Department of Justice is looking into WYNN's donation to the University of Macau. Prior investigations into the donation matter by the Nevada Gaming Control Board and SEC were closed with no actions taken.
Fitch links all of the IDRs within the WYNN corporate complex. The main rationale is that all of WYNN's assets are strategically critical to the company due to the cross-branding and marketing and that WYNN has the flexibility to move cash freely between the subsidiaries. Financial covenants at WYNN's subsidiaries do not materially restrict dividends. WYNN Las Vegas mortgage notes have a distribution basket that equals 100% EBITDA minus 1.4x interest expense, which roughly equals its FCF that will be used to help fund Wynn Boston Harbor. The mortgage notes will be callable early next year. In Macau, a leverage covenant governs dividends and Fitch estimates that WYNN is well within the relevant threshold. The tax WYNN pays on Macau gaming revenues is counted as a foreign tax credit in the U.S.; therefore, cash movement out of Macau is not a material tax event for WYNN.
Fitch forecasts negative 5% market-wide gaming revenue growth in Macau for 2016, which assumes modest sequential growth in the mass market and leaves room for continued but milder weakness in the VIP segment. We expect WYNN to consolidate market share in Macau with its Wynn Palace opening in 3Q16 and grow revenues at a faster pace than the market in 2016 and 2017. Past that, Fitch expects mid-single-digit growth in Macau led by China's rising middle class, the new capacity in Macau and infrastructure projects in and around Macau.
In Las Vegas we expect the growing convention business, increasing air capacity and lack of new room supply to drive RevPAR higher in the near term. Fitch beleives that Crown's and Genting's projects are long-term positives for WYNN as they would help to pull the center of gravity more north and away from Caesars and MGM properties that are clustered towards the south. However, these projects could place temporary pressure on WYNN's RevPAR as the market absorbs the new capacity.
LAS VEGAS ISSUE SPECIFIC RATINGS
Fitch rates Wynn Las Vegas' first mortgage notes (FMNs) due 2022 'BB+/RR2', a notch above Wynn Las Vegas' IDR and the senior unsecured notes. The one-notch uplift reflects the FMNs' springing lien, which kicks in if Wynn Las Vegas grants a lien to other debt at Wynn Las Vegas. The unsecured notes have a springing lien if the 2022 FMNs become secured or if Wynn Las Vegas grants a lien to other debt in an amount greater than 15% of assets. The FMNs, which carry a modest coupon but contain restrictive covenants, become callable at 102.688 in March 2017. If WYNN opts to call the FMNs, it can issue up to around $450 million of secured debt per its unsecured notes' lien basket.
Fitch's key assumptions within our rating case for WYNN include:
--Las Vegas revenues grow about 1%-2% per year with margins staying at around 30%;
--Wynn Macau generating about $1.075 billion of EBITDA in 2017, which factors in about $580 million EBITDA at Wynn Palace and approximately 30% EBITDA decline at the Peninsula property;
--Approximately $320 million EBITDA at Wynn Boston Harbor in 2019;
--WYNN does not repurchase shares or develop Wynn Paradise Park. Regular parent level dividends start to increase by about $100 million per year starting in 2018 with excess cash being accumulated at the parent level.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
--Gross and net leverage sustaining above 5x and 4x, respectively, following the opening of Wynn Boston Harbor;
--Depletion of parent-level cash driven by shareholder-friendly activity, which may include significant share buybacks, a sharp increase in dividends, or major equity contributions to fund new developments;
--WYNN moving forward with Wynn Paradise Park, with negative rating action parameters set around timing, cost, funding and a better clarity of the ROI prospects;
--Adverse resolution with respect to the Okada litigation;
--Worse than expected operating performance in Las Vegas or Macau with more acute sensitivity around the ramp-up of Wynn Palace.
Positive rating action is unlikely in the near term given WYNN's high leverage but Fitch may consider an upgrade to 'BB+' as gross leverage starts to approach 4x and after net leverage sustains below 4x. Better than expected ramp up of Wynn Palace, a favorable resolution to the Okada dispute and WYNN publically articulating financial targets consistent with Fitch's upgrade thresholds could accelerate the upgrade.
WYNN's liquidity is strong. The company has $2.1 billion of cash, of which Fitch estimates $200 million is used for cage-cash purposes. In addition, WYNN has $252 million of investment securities, mostly short-term corporate debt.
Wynn Palace will open in July 2016 and thereafter Wynn Macau's cash flows ($600 million - $800 million annually) are free to be distributed to Wynn Resorts and the minority shareholders. In light of Wynn Boston Harbor's increased budget (now budgeted at $1.9 billion - $2.1 billion), Fitch estimates that the project will require some cash contributions from the parent company in addition to the $1.25 billion Wynn America credit facility and approximately $430 million in aggregate distributions from Wynn Las Vegas through 2018. Wynn Resorts, the parent, guarantees the completion of Wynn Boston Harbor and has $1.2 billion in cash as of March 31, 2016.
There are no maturities until 2019 when Wynn America's $375 revolver matures and Wynn Macau term loan starts to amortize. In 2020, Wynn America's $875 term loan matures and the term loan amortization in Macau accelerates. Covenants are not a concern.
Wynn America has a $200 million minimum EBITDA and 2.75x leverage test and there is ample cushion relative to Fitch's forecasts for Wynn Boston Harbor. Wynn Macau's credit facility has a leverage covenant, which is set at 5.5x for year-end 2016 and 5.25x for year-end 2017. Wynn Macau covenants exclude the unsecured notes issued by the Hong Kong-listed Wynn Macau, Ltd and Fitch expects the covenant ratio to remain below 4x throughout Fitch's projection horizon.
FULL LIST OF RATING ACTIONS
Wynn Resorts, Limited
--IDR affirmed at 'BB'; Outlook Stable.
Wynn Las Vegas, LLC
--IDR affirmed at 'BB'; Outlook Stable;
--Senior secured first mortgage notes affirmed at 'BB+/RR2';
--Senior unsecured notes affirmed at 'BB/RR4'.
Wynn America, LLC
--IDR affirmed at 'BB'; Outlook Stable;
--Senior secured credit facility affirmed at 'BB+/RR2'.
Wynn Resorts (Macau), SA
--IDR affirmed at 'BB'; Outlook Stable;
--Senior secured credit facility affirmed at 'BBB-/RR1'.
Wynn Macau, Ltd
--IDR affirmed at 'BB'; Outlook Stable;
--Senior notes affirmed at 'BB/RR4'.