Genting’s debt bet rides on earnings ramp-up

PETALING JAYA: Genting Bhd may need a combination of stronger earnings, lower capital expenditure (capex) and asset sales to convince ratings agencies that its elevated leverage is temporary and can return to a sustainable downward path.

Of the three, earnings delivery is the most important, as the conglomerate needs to generate enough incremental earnings before interest, taxes, depreciation and amortisation (Ebitda) from its investments to offset the additional debt and capital employed, a fund manager told StarBiz.

“The group’s key issue is not liquidity, but the duration of its elevated leverage and weak free cash flow.

“Fitch Ratings’ downgrade largely formalises a deterioration that was already visible, rather than signalling a sudden deterioration in Genting’s credit quality,” he said.

The fund manager noted that Genting has moved from a relatively conservative balance sheet into a multi-year investment cycle at a time when earnings from several existing properties have been softer than expected.

“The uncomfortable part is the combination of higher debt, elevated capex and delayed Ebitda growth.

“This is a warning about execution risk over the next three years, rather than a concern over near-term solvency,” the fund manager said.

Fitch recently downgraded Genting, Genting Overseas Holdings Ltd, Resorts World Las Vegas LLC and, subsequently, Genting Malaysia Bhd (GenM).

Genting was downgraded to BBB- from BBB. The rating sits right at the bottom of investment grades.

Genting Overseas is cut to BBB- from BBB while Resorts World Las Vegas is now one notch lower at junk rating of BB+.

Fitch expects Genting’s leverage to remain stretched as the group continues to pour billions into Resorts World New York City and Resorts World Sentosa 2.0.

In New York, about US$3.7bil of the US$5.5bil expansion programme remains to be spent over the next five years.

Genting New York (GenNY) is expected to incur average annual capex of about US$800mil over the medium term.

Genting Singapore, meanwhile, still has about S$4bil of committed capex through 2030.

Fitch projects the heavy investment cycle will result in negative free cash flow, with Genting’s capex averaging RM9.2bil and negative free cash flow averaging RM4bil a year between 2026 and 2028. At the same time, the returns from GenNY expansion are taking longer to materialise.

Fitch has cut its 2026 Ebitda forecast for GenNY to US$208mil from US$215mil, citing higher startup costs tied to the phased rollout.

It nevertheless expects GenNY’s Ebitda to rise to about US$450mil by 2028 as more tables and slot machines are added and margins normalise with scale.

The credit rating agency said the pace of Genting’s deleveraging will depend largely on GenNY’s ramp up.

Pressure is also compounded by a more gradual recovery across Genting’s other gaming operations, with softer VIP volumes, high travel costs and macroeconomic uncertainty weighing on its Malaysian and Singapore businesses.

According to the fund manager, GenNY is the more “consequential” investment, given Genting’s first-mover advantage with an existing property in a large, affluent market. The problem, he said, is the mismatch between the timing of investment and earnings.

“Much depends on Ebitda generation from GenNY from 2027 to 2028 to justify the current leverage spike as reasonable and temporary.

“I am more comfortable with the strategic rationale in Singapore because Resorts World Sentosa is an established, high quality asset and Genting Singapore itself retains a substantial net cash position.

“The question now is no longer whether these are attractive assets, but whether incremental Ebitda arrives quickly enough to offset the additional debt and capital employed,” he said.

That said, the fund manager opined that Genting cannot rely entirely on GenNY while its operations in Malaysia, Singapore and Las Vegas continue to underperform.

“A recovery in Resorts World Sentosa gaming (segment), continued improvement at Resorts World Genting and better Las Vegas profitability would materially increase group Ebitda and accelerate deleveraging.

“Also, capex needs to peak and then decline, as even with a very strong Ebitda growth, Genting may still struggle to reduce its debt if it continues to spend heavily each year,” he said.

This, he added, does not mean that Genting needs to stop investing to protect its investment-grade rating, but it does need to prove that the current elevated leverage is temporary.