Whether the bonds offer value at current 87px
We believe the bonds look attractive, but only sensible for those with larger risk budgets. Placing the regulatory issues to one side and assuming the company remains a going concern, the performance of the bonds will likely be driven by whether an equity raising does or doesn’t occur over the next 12 months. Assuming a 50% weight to each probable outcome as outlined below – the CWNHB notes offer around a 6% IRR and 14% yield to maturity (YTM) respectively.
Crown recently announced it will not be redeeming CWNHB at first call on 23 July 2021. The notes are now callable on any quarterly interest payment date until final legal maturity in April 2075. Management noted the non-call decision to be in the best interests of all stakeholders and that it would reconsider calling the CWNHB notes in a year, when there is greater certainty surrounding its operational and regulatory position.
Crown’s fragile liquidity position, weakness in leverage and interest cover metrics (which would trigger coupon deferrals and ordinary dividends) as well as potential downgrade to high-yield (currently Baa3/negative (Moody’s) and BBB/watch negative S&P) make an equity raise the most likely proposition in the near term.
The company will want to resume dividends (to appease shareholders) and needs to keep their investment-grade rating. Note a downgrade to high-yield would result in the AUD175m EMTN notes to be redeemed at make-whole. Given the COVID-19 situation, the company’s only real lever to pull to manage this is an equity raising.
An equity raise would make a repayment of the CWNHB notes feasible in the next 12 months. Without an equity raising, the credit is in a very stretched position. Coupons would likely be deferred, but we note they’re cumulative and would be required to be repaid. Redemption would likely not occur for at least another 24-36 months.
A takeover from Blackstone is still on the table, but we believe the issues around the Victorian Royal Commission may have scared them (alongside the Star) off for the time being. Thus, we are excluding any takeover scenario.
Scenario Analysis
- Equity raising over the next 12 months (with coupons paid). Redemption in the next 12 months.
| Date | Coupon | Principal | Total |
|---|---|---|---|
| 3/08/2021 | -87.00 | ||
| 15/09/2021 | 4.00 | 4.00 | |
| 15/12/2021 | 4.00 | 4.00 | |
| 15/03/2022 | 4.00 | 4.00 | |
| 15/06/2022 | 4.00 | 4.00 | |
| 15/09/2022 | 4.00 | 100.00 | 4.00 |
| IRR | 7.19% | ||
| Actual YTM | 17.06% |
Source: Bloomberg
Table 2. No equity raising, coupons deferred with redemption in 24-36 months.
Note: Cumulative coupons will be paid September 2023.
| Date | Coupon | Principal | Total |
|---|---|---|---|
| 3/08/2021 | -87.00 | ||
| 15/09/2021 | 0.00 | 0.00 | |
| 15/12/2021 | 0.00 | 0.00 | |
| 15/03/2022 | 0.00 | 0.00 | |
| 15/06/2022 | 0.00 | 0.00 | |
| 15/09/2022 | 0.00 | 0.00 | |
| 15/12/2022 | 0.00 | 0.00 | |
| 15/03/2023 | 0.00 | 0.00 | |
| 15/06/2023 | 0.00 | 0.00 | |
| 15/09/2023 | 32.00 | 100.00 | 132.00 |
| IRR | 4.74% | ||
| Actual YTM | 10.97% |
Source: Bloomberg
The Star Withdrawal of AUD12bn Crown Merger Bid
In a counterintuitive way, the Star withdrawal of the AUD12bn Crown merger bid is positive for the CWNHB notes in terms of a short-term redemption. A merger between Crown and the Star would not constitute a change of control (CoC) event for the CWNHB notes, meaning there would be no step-up in margin that would likely have induced an issuer call.
For the merger to have gone ahead, the consolidated group would have seen a large increase in gearing and a cash outflow, deteriorating the credit quality of the group (notwithstanding a material equity raise or significant asset sales). With this off the table, the probability of a short-term redemption has increased (all else equal).
The credit still has significant regulatory risk, which could impact its future profitability (i.e., suspension of Melbourne and Perth gambling licenses, an AUSTRAC fine). The Victorian Royal Commission, a scathing Bergin Inquiry that has cost the heads of management and directors, and the suspension of Crown Sydney from operating a gaming venue will continue to weigh heavily on the company.
Importantly, these commission hearings and the final report, have poked the interest of other state and commonwealth regulators. Should Crown be unable to satisfy the expectations of regulators/licencing agencies as well as state governments, there is a risk of gambling licenses being revoked or suspended.
Chart 1. CWNHB Relative Value vs ASX200
Source: Bloomberg
Chart 2. CWNHB vs SEEK Subordinated Notes
Source: Bloomberg
