Crown Resorts Debt Outlook Lowered to ‘Negative’ as Regulatory Issues Mount

Posted on: October 26, 2020, 12:40h. 

Last updated on: October 26, 2020, 02:23h.

Todd Shriber @etfgodfather Read More
Expertise: Financial, Gaming Business, Mergers and Acquisitions.

Australian gaming company Crown Resorts is facing increasing regulatory scrutiny stemming from a money-laundering scandal. Credit agencies are taking note, with Fitch Ratings lowering its outlook on the gaming company’s issuer default rating (IDR) to “negative” from “stable.”

James Packer
Crown Resorts James Packer seen here in 2018. The gaming company’s outlook was lowered to negative amid mounting regulatory woes. (Image: The Australian)

Last week, Crown chair Helen Coonan said the company engaged in cleaning illicit funds, but said that happened by “ineptitude,” not intent to commit a crime. Those comments, coupled with the New South Wales inquiry, are raising concerns about governance veracity at the top of the casino operator.

The Negative Outlook reflects weaknesses in Crown’s governance structure that were revealed during an inquiry in New South Wales, as well as the risks to Crown’s operations and financial profile from potential outcomes of the various inquiries, which could include fines, changes in operating conditions and regulations, or changes to or loss of licences,” said Fitch.

The ratings agency has a “BBB” grade on Crown debt, which is toward the lower end of the investment-grade territory. Issuers rated “BBB” are considered to have low default risk and “adequate” repayment ability.

Governance Issues Galore

Earlier this month, the gaming operator told the Australian Securities Exchange it was informed about potential compliance issues. The issues are related to the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 and Anti-Money Laundering and Counter-Terrorism Financing Rules 2007, and were reported by the Australian Transaction Reports and Analysis Centre (AUSTRAC).

Crown Melbourne said it intends to comply with the assessment that started over a year ago. The investigation is bringing pressure on the board and James Packer. Packer owns 36 percent of the operator’s equity. As part of efforts to allay regulators’ concerns, Crown said it will stop working with Chinese junket operators that bring VIPs to the country, a policy that will be in effect until at least June of 2021.

Although it’s complying with the inquiry, the casino company could be vulnerable to further outlook downgrades or paring of its credit rating.

“Fitch would consider downgrading Crown’s IDR should the regulators impose onerous regulatory conditions or fines or penalties that have a significant impact on the company’s business or financial profile,” said the research firm.

Absorbing Fines

The ratings agency says Crown absorbs up to AUD $800 million in penalties (nearly $571 million) due to its current financial strength. If that’s the tab regulators hit the company with, it would be one of the largest corporate fines in Australian history.

The most severe punishment would be Crown losing its gaming license, something it’s hoping to avert by ceasing Chinese junket business. There’s been some speculation that in order to avoid that fate, Packer could liquidate his stake in the company. But it’s not immediately clear if that drastic step will be necessary.

The silver lining for Crown is that its two Australian integrated resorts aren’t heavily dependent on VIP revenue, giving the operator some incentive to steer clear of dubious junket firms.

“Border restrictions in place to combat COVID-19 will see VIP revenues remain low over the foreseeable future,” said Fitch. “Nevertheless, this volatility has a minimal effect on the group’s overall results, because VIP revenue made up less than 25% of normalized group revenues from FY16.”