OREANDA-NEWS. Fitch Ratings has affirmed Australia-based gaming operator Crown Resorts Limited's (Crown) Long-Term Issuer Default Rating (IDR) and senior unsecured rating at 'BBB'. The Outlook is Stable. Additionally, Fitch notes that Crown's planned subordinated notes are eligible for 50% equity credit.

The subordinated notes qualify for 50% equity credit under Fitch's "Treatment of Hybrids in Nonfinancial Corporate and REIT Credit Analysis" criteria. Features supporting the equity categorisation include their junior subordination priority, option to defer interest payments on a cumulative basis, 60 year maturity, and Crown's intention for hybrid capital to form part of the capital structure. The issue's step-up date in 2041, 26 years after issuance, entails an additional 1% coupon to the noteholders. Additionally, should Crown not redeem the notes after a Change of Control event, it is liable to pay the noteholders a step-up of 5%

KEY RATING DRIVERS
Strong Australian Assets: Crown's two established casinos, Crown Melbourne in Victoria and Crown Perth in Western Australia, have a long history of stable cash generation and resilient performance during economic downturns. Crown's stable cash generation results from a significant contribution from stable and predictable local markets, substantial expansion and a AUD2.2bn upgrade that ran from the fiscal year ending 30 June 2009 through to FY14. It also reflects Crown's position as the sole licensed casino operator in the respective regions.

Crown Melbourne License Extended: Crown's license to operate in Melbourne has been extended to 2050 from the current expiry in 2033. In return, Crown will pay the Victorian government AUD250m in November 2014 and an additional AUD250m in 2033. Crown may be required to pay additional amounts in FY23 subject to gaming revenue growth between FY14 and FY22. As part of the agreement, Crown is entitled to install additional gaming products, and the "super tax" on VIP program play will be removed from FY15.

The agreement between Crown and the Victorian Government ensures casino taxes will not be increased, and the licence will not be amended in its lifetime. Fitch views the changes positively, as they provide greater certainty to Crown's earnings, the change in tax structures removes one of Crown's competitive disadvantages, and the entitlement to install additional gaming presents an opportunity for expansion.

Melco Crown Dividends: Melco Crown, in which Crown has a 34.3% stake, declared USD260.68m (AUD316.69m) of dividends on its 2013 net income. Crown received its share (AUD94.4m) in 1H14. This dividend inflow is likely to be sustained and will enhance Crown's ability to finance a greater portion of its sizeable capex through cash, moderating its financial leverage. However, Fitch expects Melco Crown's dividends to decline in FY15, following the decline in gross gaming revenues and profitability of its flagship Macau property.

Significant Capex Outlay: Crown's planned capex for FY15-FY18 is AUD2.39bn (excluding the license payments to the Victorian government), of which AUD1.1bn is to be incurred by the refurbishment and upgrade of its Melbourne and Perth properties, and AUD1.3bn on its new property at Sydney. Crown has also bid for a second casino in Brisbane (the Queen's Wharf Brisbane project), in partnership with Chinese property developer Greenland Holding Group Co Ltd.

Fitch expects Crown to maintain its current trend of generating robust operating cash flows of at least AUD650m a year, which will fund most of the capex and translate into Crown maintaining its net adjusted debt / operating EBITDA below 2.50x, the point at which Fitch may consider negative rating action. Crown's net adjusted debt to EBITDA after excluding the AUD156.20m capital cash was 2.26x in 1H 15 (FY14: 1.65x excluding AUD110.9m working capital cash). Fitch projects this ratio will moderate to around 2.1x after the subordinated note issue.

Sluggish Macro Economy: Consumer sentiment is weak in Melbourne following closure of a number of manufacturing businesses, while sentiment in Perth has been hurt by a slowdown in mining activity. These factors would translate into flat to sluggish growth in mass market revenues. VIP revenues, which are driven by the inbound tourist traffic, are likely to be affected by a decline in Chinese tourist arrivals.

Growing International Footprint: Crown is directly, and indirectly through Melco Crown, engaged in the development of Studio City in Macau, City of Dreams in the Philippines, and a project in Las Vegas. Studio City is expected to commence operations in 2015, and City of Dreams Manila was inaugurated in February 2015. Crown would be required to make additional investments (over and above its sizeable planned capex) should the Las Vegas project progress. Given that the geography of these projects is outside Crown's traditional spheres of operation, the company would also be exposed to an element of project execution risk.

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- Crown Melbourne and Crown Perth will continue to be Crown's key revenue and EBITDA margin drivers until FY18;
- Blended EBITDA margin for the Australian casinos will be 28.5%;
- Annual capex from FY15 to FY18 will range between AUD500m and AUD750m; and
- Annual dividend payment from FY15 to FY18 will be AUD270m.

RATING SENSITIVITIES
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Net adjusted debt (excluding working capital cash) to EBITDA increasing above 2.5x on a sustained basis;
- Increased leverage brought on by significant negative regulatory action or additional material funding of investments, such as the Las Vegas project.

Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- Deleveraging so that net adjusted debt (excluding working capital cash) to EBITDA falls below 1.75x on a sustained basis.
No positive rating action is anticipated over the next 24 months as the company completes major projects.