Genting’s debt, equity divide

GENTING Bhd has proposed a rights issue to raise fresh cash amid rising credit costs pressures.

The corporate exercise is the first of its kind in its 55-year listing history. The fundraising comes at a time when the group’s leverage metrics are stretched by its expansionary ambitions.

Genting is expected to spend more than RM9bil in capital expenditure (capex) annually over the next three years to expand key gaming properties, especially in Singapore and New York.

Such plans have seen its debt load rise to RM45.3bil as of endJune, with a real impact on its finances.

High finance costs and capital structure obligations consume a sizeable share of operating profits, limiting net margin expansion. That, in turn, is eating into its dividend payout rates and driving away equity investors.

Rating agencies like Fitch Ratings had already downgraded the company to BBB- last month, just one notch above junk bond, or high-yield, grade.

The agency warned that it expects the pace of Genting’s deleveraging to be slow due to substantial capex spending, while the ramp-up at Genting New York LLC (GenNY) was underperforming, compounded by a gradual recovery across the group’s other gaming operations. Gaming accounts for 85% of total group revenue.

S&P Global Ratings flagged that Genting has no more buffer for earnings disappointments, warning that its funds from operations to net debt ratio of around 16% remains significantly below the agency’s 20% downgrade threshold.

Genting’s management appears ready to defend its investment-grade status, with the rights issue one option it is pursuing. The reason is economic: the company needs access to debt markets, and a further downgrade would be expensive.

A fallen angel will have to pay an extra 50 basis points to 100 basis points in funding costs as its pool of investors narrows.

As it stands Genting must address roughly RM6.27bil in major bond redemptions over the next 18-month window.

With the threat of a crossover rating still present, the rights issue is viewed as a morale-boosting signal from its main shareholders that they are ready to back the company’s deleveraging efforts with cash.

Analysts are also not overly concerned about Genting’s level of financial stress.

“We see the RM1.25bil rights issue more as a balance-sheet management exercise rather than a funding option of last resort. Genting may also consider asset disposals and other funding avenues to preserve financial flexibility,” an equity analyst with a local brokerage tells StarBiz 7.

He adds that the rights issue only modestly improves leverage, and that the bigger concern is that fresh recapitalisation may be needed before Genting’s cash flow strengthens meaningfully.

He, however, admits that it is difficult to say whether Genting can continue accessing the ringgit bond market on attractive terms, but taking on more debt may not address the bigger issue of high leverage and rating pressure.

A fixed-income fund manager told StarBiz 7 that access to the ringgit or US dollar bond markets remains to Genting, but at a price that reflects investor expectations rather than its existing credit rating.

It got a taste of that in April, when Genting raised US$1.5bil through the issuance of two tranches of unsecured subordinated perpetual bonds (sub perps) amid the threat of a downgrade in its credit ratings.

The PerpNC5.5 (perpetual non-call 5.5-year bond) and PerpNC10 tranches offered coupon rates of 7.65% and 8.3%, respectively. The high yields saw the perps oversubscribed by more than 2.2 times.

While equity investors sold Genting shares following the rights issue announcement, and analysts either cut their target price and/or calls on Genting, bond analysts appear calm about the latest announcement.

CreditSights, a Fitch Solution company, maintained its “outperform” recommendation on Genting’s sub perps and “market perform” recommendation on its more senior debt.

The credit research firm said the most effective and likely tool for Genting to avert junk status is to monetise its non-core real estate assets.

It identified the group’s prime undeveloped land holdings in Miami, Florida – estimated to be worth over US$1bil – as the primary liquidity lever capable of generating immediate cash to pay down debt and restore leverage ratios.

This divide between bond and equity investors is due to capital structure. Debt holders tend to have more legal right to claims, while equity owners are last in line.

Furthermore, Genting’s assets of over RM100bil are one reason debt investors appear to welcome the exercise, while equity investors and analysts have viewed the rights issues from a dilution perspective.

Hence, the analyst is keeping his eye on the group’s cash flow trends.

“We do not rule out another equity raising if operating cash flow disappoints and capex remains elevated. That said, Genting may still have other options, including asset disposals, dividend restraint and alternative funding avenues.

“Ultimately, the need for further equity will depend on how quickly its major investments translate into stronger earnings and cash flow,” he says.

The 24%, or 45 sen, drop in Genting’s share price following the rights issue announcement, to RM1.43 sen at last look, has attracted buying by the founders and controlling shareholder, the Lim family.

The family, which holds a 45.1% stake, has irrevocably committed to subscribing to its full entitlement, amounting to RM564mil.

With the stock trading at a 25-year low, the family has also been buying shares on the open market, Genting’s exchange filing show.

The group aims to allocate RM800mil of the rights issue proceeds to repay unspecified debt and RM430mil for general working capital, with the flexibility to redirect RM280mil of the latter towards interest payments, bringing the amount available for debt repayment to as much as RM1.1bil.

Genting’s consolidated borrowings of RM45.25bil comprise RM9.68bil in short-term obligations and RM35.58bil in long-term debt, with interest rates ranging from 3.88% to 8.45% per annum.

CreditSights, meanwhile, believes a further equity injection will be unnecessary in the short term.

“We think Genting and Genting Malaysia Bhd can refinance upcoming ringgit bonds via new ringgit bond issues, and do not think it is justified to raise a much higher cost of funding via equity to repay ringgit bonds carrying 5% coupons,” it stated in its report.