Crown Credit Update: H1 2022 Result
The overall weak H1 2022 result needs to be placed into context with Blackstone’s bid for Crown being recommended by the Board. If the Blackstone bid proceeds, then it is likely the CWNHB notes will be redeemed following a change of control (CoC) event.
Why?
Should CWNHB notes not be redeemed, the margin will increase by 5-9%. In the current market, this is very expensive, even considering Crown’s credit profile may weaken with private equity (PE) at the helm.
We expect Blackstone to be successful in its bid. In the rare case that the Blackstone bid fails, the CWNHB redemption would be pushed out and the price would be re-rated. Even so, what gives us greater conviction around topping-up here on potential price weakness would be that Crown’s top-line will improve as the economic recovery gains further strength.
The opening of international borders and increase in tourism/consumer spending should result in higher free cash flow (FCF) and the ability for Crown to redeem within the next two years. Thus, the worst-case scenario doesn’t appear to be that bad.
What should investors do?
Assuming a next call of April 2022, the CWNHBs offer a trading margin of 11.4%. An October 2022 call gives a trading margin of 7.4%. Given the run the CWNHBs have had, we would recommend investors continue to hold the CWNHBs, with the worst-case scenario not cataclysmic by any means.
Crown did breach its key financial ratios under the CWNHB terms, which means that interest payments on the CWNHBs have been mandatorily deferred. A mandatory deferral event exists for CWNHB, owing to a breach of the Interest Coverage Ratio (ICR). The ICR was 0.6x, being below the minimum level of 2.5x.
The Leverage Ratio was also breached at 22x, being above the maximum level of 5.0x. We note however, such deferral is cumulative and compounding for investors. While from an income perspective this is sub-standard, we see deferred payments as being withheld only for a short period of time.
In February 2022, Crown announced it had entered an implementation deed with Blackstone at a price of AUD13.10 cash per share. Crown’s board have recommended shareholders vote in favour and the Scheme of Arrangement (SOA) meeting is set to be held in Q2 2022 CT.
Turning to the H1 2022 result:
- The H1 2022 result was marked as challenging by management, whilst highlighting that the group is on the recovery highway going forward.
- The rare positive in a weak result was a 34% increase in statutory revenue to AUD779m (up 30% on pcp). Gaming operations in Sydney and Melbourne were heavily impacted by COVID-19, with Perth carrying the top-line.
- EBITDA (before closure and significant items) on a theoretical basis (normalising variance in win rate on VIP play) was down 80% to AUD29m.
- Statutory NPAT was (AUD196m) vs (AUD121m) on pcp.
- The cash balance is substantial at AUD524m, with a further AUD170m in committed undrawn facilities.
- Net operating cashflow was (AUD204m) vs AUD72m on pcp.
- Overall credit metrics would have weakened mainly off the back of EBITDA (before closure and significant items).
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