Melco focus debt cutting, caution on spending: analysts

Published 21 November 2023

Casino operator Melco Resorts & Entertainment Ltd is likely to “continue to exercise caution in managing its spending,” as it aims to bring down its leverage “closer to pre-pandemic levels,” suggests a note from S&P Global Ratings.

Melco Resorts’ total debt stood at US$7.77 billion at the end of September, a reduction of US$100 million compared to the total debt balance as of June 30, 2023, according to the company.

The debt figure was “about 70 percent higher than the level in 2019,” stated the ratings agency. “This was a result of three years of cash burn amid strict Covid-19 restrictions in Macau and China, and investments in Studio City Phase 2, and City of Dreams Mediterranean,” wrote analysts Aras Poon and Sandy Lim.

Melco Resorts opened Phase 2 of its majority-owned Studio City complex (pictured), in Macau’s Cotai district, in stages between April and September this year.

In July, the company launched its casino resort City of Dreams Mediterranean, in the Republic of Cyprus.

S&P Global expects Melco Resorts’ leverage “to recover closer to the pre-pandemic level in 2025”.

The institution said: “Melco Resorts had a record of operating with a leverage of below 3.0 times before the pandemic, and it aims to maintain this level of leverage in the long run.”

It added: “We believe the company will focus on debt reduction and continue to exercise caution in managing its spending on shareholder returns and investments during the next 24 months to achieve this target.”

Melco Resorts generated third-quarter adjusted property earnings before interest, taxation, depreciation and amortisation (EBITDA) of US$280.6 million, 5.0-percent higher sequentially.

S&P Global forecast Melco Resorts’ leverage – debt-to-EBITDA ratio – to fall to 4.2 times for 2024 and 3.2 times for 2025, from 7.0 times over 2023. That compared with 2.7 times in 2019, it noted.

Separately, Singapore-based Lucror Analytics said in its own memo that Melco Resorts “has a strong liquidity profile, with a robust cash position,” and “will likely generate positive free cash flow” this year.

“While Melco Resorts will face a debt maturity cliff in 2025, we expect refinancing risks to be manageable,” wrote Lucror’s credit analyst Leonard Law.

According to Mr Law, a resumption of large dividend payments or share repurchases at Melco Resorts “before the recovery of its balance sheet to pre-pandemic levels – not expected to happen until end-2024 – would be highly credit negative”.