As the hot water rises around Crown Resorts in New South Wales, Moody’s Investors Service has downgraded the company’s debt rating, a move that is expected to be seconded by Fitch Ratings.
Acting on the recent decision by the state’s regulators to prevent Crown from opening the gaming floor at Crown Sydney𑁋its new multibillion-dollar casino hotel scheduled to debut on Darling Harbour in December𑁋 Moody’s downgraded Crown’s rating from Baa2 to Baa3.
The move reflects “an increasing likelihood of material downside implications from the escalating regulatory investigations Crown is facing,” said Moody’s analyst Maadhavi Barber.
Crown has been under investigation by the NSW Independent Liquor and Gaming Authority since January after a series of explosive 2019 reports in the national media accused the company of abetting money laundering in the VIP rooms at its flagship Crown Melbourne casino in league with foreign junkets with ties to organized crime in China and Hong Kong.
The investigation has exposed a litany of compliance and due diligence failures at the highest levels of the ASX-listed casino giant, and Crown has admitted that money laundering likely took place in its high roller business. It has promised to address its problems, although it appears so far that little concrete action has been taken except to suspend all junket-based operations.
The investigation, whose legal counsel believes Crown is unsuitable to hold a license in New South Wales, is slated to issue its findings in February. While these are expected to stop short of recommending revocation, they could result in heavy fines, stringent reforms and an order that former Chairman James Packer sell down his shares.
The 36 percent of the company Packer controls through his privately owned Consolidated Press Holdings is blamed in large part for fostering a corporate culture whose emphasis on aggressively pursuing the international VIP trade led to social and regulatory obligations being relegated to the back burner.
Moody’s said it believes the company’s problems could extend also to Victoria and to Western Australia, home of its Crown Perth casino.
As of last week, Fitch had Crown on credit watch negative, citing the “heightened risk of severe regulatory action” in all three states, which “would have a significant impact on the company’s business or financial profile.”
Analysts, meanwhile, are wondering what will happen if Packer is forced to divest, with some speculating that it could clear a path for U.S. private equity giant Blackstone, which owns 10 percent of the stock, to engineer a takeover, while others have begun arguing the case for a merger with NSW rival Star Entertainment, which long held the casino monopoly in Sydney before Crown broke it.
“The risks facing Crown, and to a lesser degree Star, warrant serious consideration of a merger of the two companies,” analyst Sacha Krien of Melbourne-based financial consultants Evans and Partners told the Sydney Morning Herald.
In support of his reasoning he cities the possible loss of the Sydney casino license or new restrictions on that license; reviews of Crown’s Melbourne and Perth licenses; and a Sydney casino limited in its earnings capacity, assuming the license there is retained.
Star, for its part, faces a new competitor for VIP/premium tables in the Sydney market and restrictions on VIP junkets in the wake of the Crown inquiry, he said.
Krien and Macquarie’s David Fabris estimate an increase in the value of the merged group of 33 percent and 30 percent, respectively.
Fabris told the Herald a merger would create an estimated A$150 million in synergy benefits and boost earnings per share by 5 to 9 percent.
