Genting’s casino gamble, stake buys pressure bonds

Hong Kong (Reuters) – Malaysian casino operator Genting Bhd’s bonds have performed poorly and are at risk of being downgraded, analysts say, as soaring costs and delays at its multi-billion dollar Singapore casino threaten its fortunes.

Genting has reassured investors that building costs are under control but analysts are also worried the cash-rich company could acquire new companies and enlarge gaming stakes in the United States and Britain, further straining its finances.

A unit of the company is building a casino on Singapore’s resort island of Sentosa and costs have escalated by 15 percent to around SGD 6 billion (USD 4.4 billion), due mainly to higher building expenses amid a booming construction sector.

„The Singapore capex overhang may continue to cause the cash bonds to underperform despite overall stable credit quality expected,“ said Brayan Lai, credit analyst with Calyon Corporate & Investment Bank.

This week, Lai cut his recommendation on Genting’s 2014 bond to underperform from market perform. The bonds are trading at around 340 basis points above U.S. Treasuries.

Spreads on Genting’s 2014 bonds have risen sharply since it reported the SGD 800 million cost overrun in November last year.

Spreads jumped up from around 150 basis points over U.S. Treasuries.

Analysts say there could be further cost increases and a possible delay beyond its original schedule in 2010.

„There is a big question mark about the casino, whether it is economically viable. There is execution risk in the Sentosa project,“ said Warut Promboon, credit analyst with ING.

Last month, Genting’s chairman and chief executive Lim Kok Thay, said the project’s costs and schedule were under control.

Although the comments boosted the shares of its Singapore-listed Genting International to a 5-month high, Genting Bhd’s bonds remain under a cloud.

Resorts World at Sentosa, the operator of the Singapore casino, is a wholly-owned unit of Genting International.

Lehman Brothers credit analyst Harsh Agarwal said Genting Bhd’s 2014 bonds have massively underperformed the market, with investors pricing in a one-notch rating downgrade.

Standard & Poor’s Ratings Services cut Genting’s rating by a notch last December to BBB, or just two notches above junk status. It said there could be more downgrades if certain debt ratios worsened for 2-3 quarters.

It said the rating could come under pressure if Genting Bhd’s debt-to-EBITDA ratio rose above 3.3 times and if funds from operations to debt fell below 25 percent. Currently, the ratios are 2.33 times and 34.5 percent, respectively.

Acquisition Worries

The Singapore project overhang is not the only worry for Genting, analysts say.

Lehman’s Agarwal says the company could make a bid for British bingo and casino company Rank Group. Genting is Rank’s biggest shareholder, owning 11 percent of its equity.

„If they fund it with cash and debt, without any equity, it would be a big acquisition and in a market which is not doing well right now,“ he said.

Last week, Genting reported a 33 percent fall in first-quarter net profit, due mainly to lower earnings from its UK casino business, as the British economy slowed.

Meanwhile, there are also concerns the finances of the company could come under additional strain if it were to spread its operations to a mature gambling market such as Las Vegas.

Genting’s head of strategic investments, Justin Leong, told Forbes magazine that his company could set up business in the United States.

He said Genting could build a new casino or take over a listed casino company, as stock prices are expected to turn even more attractive in the next 6-18 months.

Credit analysts say investors should buy protection on Genting’s debt via its credit default swaps (CDS), insurance-like contracts that protect against defaults, which had outperformed its bonds.

„We recommend buying protection on Genting. The funding can come from selling protection on IOI or the high grade index,“ said Lehman’s Agarwal.

Genting’s 5-year CDS trades just 10 basis points wider than the 5-year contract for Malaysian oil palm planter IOI Corp, rated one notch higher at BBB-plus. Analysts say the gap should widen to 40 basis points.