Wynn Resorts Finance Unit Downgraded on Macau Weakness
Wynn Resorts’ (NASDAQ:WYNN) Wynn Finance arm was downgraded by Moody’s Investors Service, with the research firm citing ongoing weakness in Macau.
The rating agency takes the credit grade on the gaming company’s finance unit to B1 from Ba3, and the probability of default to B1-PD from Ba3-PD. Moody’s also lowered the rating on Wynn Macau’s and the US-based parent company’s senior notes to B2 from B1.
The rating downgrade reflects Moody’s expectation that Wynn’s credit metrics will remain weaker than pre-pandemic levels, because of the slow recovery in earnings amid lingering travel restrictions affecting Wynn’s Macau operations given the still heightened social risk due to the negative effect the coronavirus continues to have on visitation and travel in the region,” said the research firm.
In a standard operating environment, Macau drives two-thirds of earnings before interest, taxes, depreciation and amortization (EBITDA) for Wynn. That’s fine when things are normal in Macau. But that’s far from the case today, as coronavirus-related travel restrictions, the specter of a tighter regulatory environment, and more recently, the likely end of the VIP junket industry weigh on concessionaires in the world’s largest casino center.
2022 Likely to Be Tricky for Wynn
Heading into 2022, the prospects for an earnest rebound in Macau are murky at best. With obituaries for the junket business being penned, Wynn is responding with efforts to make Wynn Macau and Wynn Palace more appealing to premium mass players.
Still, it will take time for those moves to pay dividends. In the interim, Moody’s expects Wynn’s consolidated earnings will be below pre-pandemic levels through 2022, because a rebound in Macau gross gaming revenue (GGR) “will likely be gradual and bumpy.”
“Improved operating performance at Wynn’s Las Vegas properties and Encore Boston Harbor is not enough to fully offset the lingering weakness in Macau. As a result, Moody’s expects leverage will remain elevated until a recovery is more fully realized in 2023,” adds the ratings agency.
While its domestic venues are performing admirably, Macau risk is the primary reason shares of Wynn are off 23.5 percent year-to-date, and why the stock is a favored target of some short sellers.
Don’t Expect Ratings Upgrade
For now, Wynn and the aforementioned financial unit sport junk credit ratings. It’s unlikely that will change over the near-term because of the situation in Macau, according to Moody’s. At a minimum, the operator needs to maintain a debt/EBITDA ratio below 6x.
“An upgrade would require casinos to remain open and ramp up closer to normal utilization, a restoration of sufficient earnings to generate meaningful positive free cash flow before discretionary development spending, and the continued ramp-up of Encore Boston Harbor,” says the ratings agency.
Looking to potential 2022 catalysts, there’s speculation among analysts that amid executive change at Wynn, the company could mull sell its Macau properties or engage in industry consolidation as a buyer. Some market observers speculate the company could be sold outright to a cash-rich private equity suitor.
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