Fitch Expects to Rate Imperial Pacific International 'B(EXP); Proposed Secured Notes 'BB-(EXP)'
The ratings reflect the short operating history of IPI's gaming business in Saipan, which is almost entirely driven by the volatile high-rolling VIP segment. IPI's ratings are supported by a low tax regime, attractive location, the use of junkets/guarantors in its VIP gaming business and addition of tourist amenities in Saipan by IPI and other parties.
The ratings are constrained by the high mobility of VIP players, who have a wide selection of established casinos in Asia to choose from. There is no certainty that the eventual performance of IPI's new casino in Saipan will match the performance of its temporary casino on the island and that of casinos in other Asian locations on a sustained basis.
The expected ratings assume IPI will raise sufficient funding from the proposed secured bond issue and other potential debt facilities to cover capex and refinancing needs. The company had capital commitments of HKD3.0bn at end-June 2016, mainly for construction for a new casino and resort in Saipan that it expects to be operational by January and April 2017 respectively. The new casino will replace the temporary one that has been operating for about a year.
The proposed notes, which will be issued by Imperial Pacific International (CNMI), LLC (Saipan), are rated two notches above IPI's IDR because they are secured by essentially all the assets of the casino and resort under construction and guaranteed by Imperial Pacific Properties (CNMI), LLC, which owns the lease of the land on which the resort is built, and by the parent, IPI.
Final ratings are contingent upon the successful raising of sufficient funding from the proposed secured bond issuance and other potential debt facilities to cover its capital commitments of HKD3.0bn at end-June 2016, and receipt of final documents conforming to information already received.
KEY RATING DRIVERS
Junket Driven: The high-rolling VIP segment is volatile, junket-driven and subject to policy uncertainty. The Commonwealth Casino Commission of Saipan is vetting a number of junket operators before they start doing business with IPI.
The commission has already given approval for eligible junket operators to share rebates from casinos with their players. Subject to the commission's further approval, the operators will be allowed to share profits with IPI and assume the credit risks of the VIP players. So far IPI has been operating the VIP business through third-party introductions and internal marketing, with IPI granting credit directly to the VIP customers, a large portion of which are backed by guarantors.
Short Operating Track Record: The sustainability of IPI's niche casino business model is dependent on its ability to manage relationships with VIPs and receivable risks. The company has about one year of operating history in its temporary casino. Monthly VIP rolling chips consistently amount to more than USD1.5bn each month. Initial performance for IPI's temporary casino in Saipan may not be sustainable as the curiosity factor fades.
Active Development of Tourism: Lodging is currently the major bottleneck for the increasing number of VIP visitors, but this is being addressed with the opening of a new luxury hotel in 2016 and the opening of IPI's own hotel in April 2017. In addition, flight frequencies to Saipan from cities in north-east Asia are gradually increasing.
Advantages of Saipan: IPI leverages on its competitive advantage in attracting VIPs in a low gaming tax and safe environment under the US laws. IPI paid a 1.3% rebate to VIPs in 1H16; it has received approval from the Commonwealth Casino Commission to pay a rebate to VIPs of up to 1.8%, which is higher than the rates paid in most other Asian countries. Saipan is well-positioned to cater to players in north-eastern China, with flight time of around five hours and a visa-on-arrival policy for Chinese citizens.
Fitch's key assumptions within the rating case for IPI include:
- Gross gaming revenue of USD700m-800m in 2016 and USD800m-1,100m a year in 2017-2018;
- 70% of VIP revenue sourced from junket operators or introductions in 2016-2018;
- Commission rates of 1.4% to VIP and 1.85% to junket operators in 2016-18;
- Capex of USD500m-550m in 2016 and USD100m-200m a year in 2017-2018.
Positive rating guidelines: Future developments that may, individually or collectively, lead to positive rating action include:
- Leverage as defined by total debt/EBITDA sustained below 3x (12 months to June 2016: 1.4x)
- Sustained positive free cash flow
-Ability to achieve stable VIP gaming revenue after the new casino starts operation as scheduled
Negative rating guidelines: Future developments that may, individually or collectively, lead to negative rating action include:
- Leverage as defined by total debt/EBITDA sustained above 4.5x after the new casino has commenced operation
- Trade receivable days from VIP gross gaming revenue sustained above 100 days after the commencement of junket operations (June 2016: 79 days)
- Significant cost-overrun in construction capex or major delay in the launch of the new casino and resort
Financing Plan: IPI has short-term debt of HKD1.1bn, convertible bonds of HKD561m due August 2017 and capex commitment of HKD3.0bn as at end-June 2016, which will be satisfied by the proposed issuance of US dollar senior secured notes and other potential debt facilities.
FULL LIST OF RATING ACTIONS
Imperial Pacific International Holdings Limited
-- Expected Long-Term Issuer Default Rating assigned at 'B(EXP)': Stable Outlook
Imperial Pacific International (CNMI), LLC (Saipan)
-- Expected rating on US dollar senior secured notes assigned at 'BB-(EXP)', with Recovery Rating of 'RR2'
In accordance with Fitch's policies the issuer appealed and provided additional information to Fitch that resulted in a rating action which is different than the original rating committee outcome.