Crown Resorts Public Relations Mess Could Turn Into Credit Ratings Nightmare

Posted on: August 12, 2019, 05:00h. 

Last updated on: August 12, 2019, 01:05h.

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

Crown Resorts, the Australian casino operator mired in controversy because of alleged ties to junket runners with connections to organized crime, faces another potential problem: mounting investigations into the company’s business practices could prompt downgrades of its corporate credit rating.

Melco Resorts CEO Lawrence Ho. His role at a company called Lanceford could doom a deal with Crown Resorts. (Image: CNBC)

Last week, the Independent Liquor and Gaming Authority in the Australian state of New South Wales (NSW) said it is investigating a sale of shares in Crown Resorts Ltd. by James Packer’s CPH Crown Holdings Pty Ltd. to Melco Resorts & Entertainment Ltd., which is owned by Lawrence Ho.

Evidence given to Australian regulators indicates that until recently, Ho was involved with a company that was barred from working with Crown Resorts. In May 2018, Ho agreed to acquire a 20 percent stake in Crown for $1.75 billion. At that time, filings indicated Ho was a director of Lanceford Company Ltd. Lanceford is described as a holding company with investors including Stanley Ho –  Lawrence’s father – his third wife, and five children from Stanley’s second wife.

The inquiry will also look into various allegations made against Crown in recent media reports, and following a number of other announced investigations into Crown at the state and federal level, as well as an investigation into the government official’s dealings with the company,” said Moody’s Investors Service in a recent note.

The recent imbroglio facing Crown Resorts started after several Australian media outlets said Crown exploited weaknesses in Aussie immigration policies to expedite visas for Chinese high rollers, prompting an investigation into the matter by the Department of Home Affairs (DHA).

Risking A Downgrade

Moody’s says investigations into Crown that are piling up put the gaming company’s credit rating at risk for a downgrade.

“The investigations are credit negative because it opens Crown to reputational damage, as well as the potential for regulatory intervention and licensing issues,” said the ratings agency. “Crown has denied the allegations and vowed to cooperate with authorities in any investigations. We will continue to follow the situation as it unfolds and assess the materiality of any potential credit implications when more information becomes available.”

Moody’s has a Baa2 rating on debt issued by Crown Resorts with a “stable” outlook. Corporate debt with one of the three Ba ratings issued by the agency are “judged to have speculative elements and are subject to substantial credit risk.”

The aforementioned media reports that looked into Crown’s supposed ties to triad-connected junket operators also sparked a review by the Australian Commission for Law Enforcement Integrity (CLEI) to see if the gaming giant knowingly allowed criminals into the country so they could gamble.

NSW Inquiry

The investigation by NSW authorities is being conducted under the auspices of Schedule 35 of the Casino Control Act of 1992. The crux of the review is aimed at ascertaining whether or not Crown management and executives are free of criminal influence.

That legislation was passed to provide for the establishment of a casino in NSW’s Barangaroo district. Crown doesn’t have a gaming property there, but the company broke ground on the $1.49 billion Crown Sydney project in the area in 2017, which is expected to be completed in 2021.

The investigations are taking tolls on shares of Crown and Lawrence Ho’s Melco Resorts & Entertainment. The New York-listed shares of Melco, trading on the NASDAQ under the ticker “MLCO,” are lower by 15.51 percent this month.