Hit hard by the temporary closure of the NagaWorld integrated resorts due to Covid-19, Hong Kong-listed operator NagaCorp Ltd plans to issue senior notes to investors in Asia and Europe to refinance its $300 million 2021 notes maturing next year, and other expenditures of the company and its restricted subsidiaries.
The latter, assuming there is a remainder from the redemption of the 2021 notes, it said in a filing with the Hong Kong Stock Exchange on Monday.
Its announcement said its actual level of cash operating expenses in coming periods could be impacted by unforeseen developments of events beyond its control.
Presently, the group’s Naga 1 Hotel is operating with reduced occupancy and limited food and beverage facilities while Naga 2 is closed. Duty-free operations at NagaCity Walk remain in operation.
It projects that after giving effect to the proposed use of the net proceeds from the notes, liquidity including cash and deposits of $464.9 million as of March 31, 2020, and $527.1 million as of May 31, 2020, could shore up operating expenditure and interest expenses with minimal revenue for approximately 18 months.
“Although we have no other existing facilities to provide further liquidity, we believe that, after giving effect to the application of proceeds of the proposed notes issue . . . our liquidity could support approximately 18 months of operating expenditure and interest expenses, with minimal revenue.
“The proceeds on the proposed notes issuance might redeem some or all of the outstanding 2021 notes including accrued interest, costs, charges, premiums and expenses, as well as other amounts incidental to the repayment of the 2021 notes on or prior to maturity on May 21 next year,” it said.
As the terms of the non-convertible notes such as the aggregate principal amount, tenure, offer price and interest rate have yet to be determined, the scale is not certain.
The terms of the notes will be conducted via a book-building exercise by investment banks Credit Suisse Group AG, Morgan Stanley & Co International Plc and UBS Group AG as joint global coordinators, bookrunners and lead managers.
The investment banks, NagaCorp and others are expected to enter into a purchase agreement once the terms of the notes are finalised.
The completion of the proposed notes issuance is subject to, inter alia, market conditions and investors’ interest and therefore may or may not proceed.
In the meantime, NagaCorp controlling shareholder and CEO Chen Lip Keong has committed to subscribe up to $45 million in principal amounts via his wholly-owned company ChenLipKeong Capital Ltd, which is incorporated in the Cayman Islands.
“It is to show his support for and confidence in the group,” the statement read, adding that details of Chen’s subscription that have not been fixed and are subject to finalisation, will be announced based on the listing rules, as and when appropriate.
The 2021 notes with an interest rate of 9.375 per cent were issued by the group on May 21, 2018.
The suspension of its casino operations on April 1, 2020, following instruction by Cambodia’s Ministry of Economy and Finance on March 31, caused the company to undertake a series of actions to reduce its cash expenditures.
It hopes to reduce its largest bill, the run-rate operating cost, to $3.9 million from $13.9 million in the first three months ended March 31, 2020.
For the first three months ended March 31, 2020 (3MFY20), which is before the casino’s closure, average monthly expenditures were $18.4 million, consisting of run-rate operating costs of $13.9 million, maintenance capital expenditure of $1.3 million and interest expense of $3.2 million.
It also incurred monthly gaming obligation and non-gaming obligation payment of $900,000.
To date, the group has scaled back its hotel and food and beverage operations, reduced payroll expenses by limiting staff on-site and reducing employee pay since April. It also closed facilities to reduce expenditure on utilities.
“After giving effect to these initiatives, we expect that our monthly run-rate operating costs will be $3.9 million,” it said.
The group, which has been in operation for 25 years, has an exclusive gaming licence to operate within a 200km radius of Phnom Penh. The licence is expected to expire in 2065.
In 3MFY20, net gaming revenue rose four per cent to $167.6 million compared to $160.7 million a year ago while gross gaming revenue went up 15 per cent to $368.9 million in the first quarter versus $321.2 million in the corresponding period last year.
Despite Covid-19, the development of its $4 billion Naga 3 continues, with completion expected by 2025, increasing the group’s capacity by two times.
The combined NagaWorld complex of Naga 1, Naga 2 and Naga 3 is anticipated to house 5,000 hotel rooms, 1,300 gaming tables and 4,500 electronic gaming machines and other non-gaming attractions.
Separately, global rating agencies Moody’s Investor Service Inc and S&P Global Ratings assigned a B1 senior unsecured rating with a negative outlook, and B+ rating with a stable outlook, respectively, over the proposed issuance.
“The rating is aligned with NagaCorp’s B1 corporate family rating, as the upstream guarantees from major operating subsidiaries mitigate structural subordination risk for bondholders.
“The proposed bond issuance will reduce refinancing risk and address NagaCorp’s 2021 debt maturity amid challenging market conditions for fundraising,” said Moody’s analyst Junling Tan.
The ratings agency opined the cash and deposits as at May 31, 2020, would be sufficient to cover the estimated “cash burn” over the next 12 months if the casino closure is prolonged.
“Therefore, NagaCorp will likely rely on external funding to address its $300 million bond maturation,” it said.
On the assumption that casino operations resume in the third quarter of 2020 and with the proposed issuance of the notes, Moody’s expects the adjusted debt to earnings before interest, taxes, depreciation and amortisation (Ebitda) to weaken to about 2.3 times from 0.5 times in 2019.
“However, [we] expect [that] a subsequent gradual recovery in operating conditions due to increased international travel and bond repayments in May 2021 will drive an improvement in adjusted debt/Ebitda to around 0.7 times in 2021,” it said.
Commenting on the negative outlook, Moody’s said it is based on the expectation that the group’s earnings and credit metrics will weaken in 2020 with the extent and pace of any subsequent recovery remaining uncertain for now.
“An upgrade [on the outlook] is unlikely over the next 12 to 18 months, but it could return to stable if the casinos reopen,” it said.
Meanwhile, S&P Global reportedly said it expects NagaCorp to “appropriately manage the refinancing or redemption of its unsecured notes over the next 12 months”.
S&P also expressed the belief that the group would continue to hold a “dominant market position” in the Cambodian gaming sector.