OREANDA-NEWS. S&P Global Ratings said today it revised its rating outlook on Studio City Co. Ltd. to negative from stable. At the same time, we affirmed our 'BB-' long-term corporate credit rating on the Macau-based casino operator. We also affirmed our 'B' long-term issue rating on the senior unsecured notes that Studio City Finance Ltd. issued. Studio City Finance's existing and future restricted subsidiaries, including Studio City, guarantee the notes. In line with the outlook revision, we lowered our long-term Greater China regional scale rating on Studio City to 'cnBB' from 'cnBB+' and on the notes to 'cnB+' from 'cnBB-'.

"We revised the outlook because of a slow ramp-up in the operations of Studio City's new casino and the company's weakened mid-term growth prospects. We believe these factors, if they persist, could expose Studio City to substantial refinancing risks over the next 12 months and reduce the likelihood of extraordinary group support from its parent, Melco Crown Entertainment Ltd. [MCE group]," said S&P Global Ratings credit analyst Sophie Lin.

We anticipate that still-tough operating conditions in Macau's gaming industry and risks of cannibalization between new and existing casinos will keep the ramp-up of the new casino's operations slow and delay the reduction of debt leverage.

Studio City's cash flow generation is weak and its debt level remains high, leading to credit metrics that are unlikely to improve significantly in 2016 and 2017 as we had previously anticipated. Studio City's reported adjusted EBITDA of about US$36 million in the first half of 2016 is substantially lower than our previous expectation of US$70 million-US$90 million. As a result, we revised our comparable rating analysis for Studio City to neutral from positive and lowered the company's stand-alone credit profile (SACP) to 'b-' from 'b'.

We see substantial refinancing risks for Studio City over the next 12 months. The company is likely to breach the financial covenants on its Hong Kong dollar (HK$) 10.86 billion senior credit facilities on the first test date for compliance, which commences on March 31, 2017. This may trigger a technical default and accelerated payment of the senior loan, if the company fails to obtain a waiver from its bank creditors or refinance the outstanding loan on time.

In our view, Studio City may have to refinance the outstanding senior credit facilities over the next 12 months. We note that the company had amended the covenants on its senior credit facilities in November 2015, whereby the financial covenants were loosened from the original agreement. We believe that bank creditors might be unwilling to provide a further loosening of covenants, waivers, or amendments within a short period. Studio City's good banking relationship and track record of prudent risk management mitigate the risks. We revised our assessment of the company's liquidity position to less than adequate, from adequate, based on these factors.

The affirmed rating mainly reflects our assessment of extraordinary group support to Studio City from its parent MCE group in times of stress. We believe that Studio City is currently a strategically important subsidiary of the MCE group, and this results in a three-notch rating uplift from its SACP of 'b-'. Studio City's close linkage with the MCE group's brand image and common panel of management, and its relationship with the Macau government and gaming regulator supports our assessment. The MCE group controls 60% shares of Studio City and the new casino operates under MCE's gaming sub-concession in Macau.

Nevertheless, we believe the importance of Studio City to the MCE group's growth and operating performance could diminish, if operations do not improve materially over the next 12 months. This could reduce Studio City's importance within the overall group and diminish the MCE group's support and long-term commitment. The MCE group currently holds a 60% stake in Studio City, with New Cotai owning the remaining 40%. This may result in a less-flexible table allocation within the MCE group and reduce incentive for management to bring high-value customers to a partially owned new casino versus other fully owned casinos.

We may lower the ratings if Studio City's liquidity position deteriorates or the company fails to refinance the senior secured credit facilities on time, such that we view its financial commitments to be unsustainable in the long term.

We could downgrade Studio City by multiple notches if we believe the company's medium-term growth prospects erode and its importance to the group diminishes, such that we no longer assess it as a strategically important subsidiary of MCE group. We could also lower the ratings on Studio City if we believe the group credit profile of the MCE Group has weakened.

We could revise the outlook to stable if the performance of the new casino accelerates materially and Studio City's liquidity position improves to adequate. We could also revise the outlook to stable or upgrade the company if we assess Studio City as a more important entity of the MCE group.