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Crown Resorts: Demerger a positive impact on Sub Notes

On the 15th June 2016 Crown Resort Limited announced to the ASX planned initiatives to “enhance shareholder value”. These initiatives will significantly transform the company balance sheet and provide greater transparency on the underlying assets.

 

Crown CEO said “The proposed demerger reflects the different nature of Crown Resorts’ controlled Australian operating assets from its international investments. It will provide investors with greater investment choice and transparency on the underlying quality of all of Crown Resorts’ assets.”

 

From a subordinated noteholder’s (ASX Code: CWNHA, CWNHB) perspective the overall effect is positive and this is reflected in the intraday prices (CWNHA +4.0%, CWNHB +16% at ~12pm). We upgraded both securities on 27th May following the sell down of Melco stake in early May.

 

These initiatives (described below) don’t change the fact that uncertainty remains with the company, its assets and the major shareholder. Once all of these initiatives have been completed (which could be anywhere from 6 – 19 months) Crown Resorts (the issuer) will have significantly lower leverage (see the table below) and will have greater debt headroom to fund projects such as Crown Sydney while maintaining its current credit rating.

 

This funding problem was one of the primary drivers of underperformance over the past year and removing this obstacle is the reason for today’s jump in price. Crown is a great example of why understanding a company’s cost of future capital expenditure (especially for brownfield / greenfield construction projects) and how it is funded will influence performance. If a company is committed and there is funding uncertainty this will inevitably have a negative price impact.

 

The announcements today (and in May) are a very strategic and a clever use of capital to maximise shareholder value. While it is still too early to know what the realised dollar value of these initiatives will be for Crown, we expect the possible REIT spinoff to be the only initiative to reduce debt. Below we have created a table using very conservative estimates on EBITDA and capital expenditure to demonstrate forward leverage and debt headroom.

Crown

Negatives:

– Crown Resorts have revised their its dividend policy. It has increased the dividend payout ratio to 100% of NPAT. This is a credit negative for company and noteholders.

 

Positives

– A public offering for a 49% interest in a property trust (like Bunnings in BWP Trust), which would own all the Australian hotels excluding Crown Towers Melbourne. We conservatively estimate this could realise cash of ~$200 million (excluding Crown Melbourne) which could be used to pay down debt and assist in the funding of the projects at Crown Sydney and Crown Melbourne.

 

Neutral

– International asset spin off. This will provide transparency and choice to shareholders who have an interest in the international assets (i.e. MPEL stake). We expect this will provide value to shareholders but it will have no real impact on the credit profile of CWN.

Overall, we retain an improving outlook on Crown and await the execution of these strategies. This announcement does not derisk the company immediately and therefore we do not expect it will be upgraded by the Credit Rating Agencies. Given the large intraday change in price for the subordinated notes the value is partially reduced.

We maintain our recommendations but will closely watch the price action in coming days and adjust our recommendation accordingly.

 

Click here for the ASX Announcement

Click here for the CWNHA Research Report

Click here for the CWNHB Research Report