Universal Entertainment Hit with CCC+ Credit Rating as Fitch Worries About Okada Manila SPAC Deal

By | June 1, 2021

Japanese gaming company Universal Entertainment Corp.’s (UEC) credit rating has been lowered to “CCC+” from “B” by Fitch Ratings. The research firm expressed concerns about the operator’s plans to list its Okada Manila integrated resort business on a US exchange.

Okada Manila
The Okada Manila integrated resort. Fitch is wary of Universal Entertainment’s SPAC plans and cash flow. (Image: Pinterest)

Corporate bonds rated in “C” territory are considered highly speculative and vulnerable to default. That’s particularly relevant when it comes to Universal, because the pachinko device manufacturer has $118 million worth of senior secured notes coming due in December. Fitch worries that the company may not have the liquidity to service that debt unless free cash flow (FCF) “improves significantly in the second half or additional funding is raised.”

We also believe that UEC’s business profile is no longer commensurate with the ‘B’ category in view of its increased earnings and cash flow volatility, which has been amplified by the pandemic in both the casino business and domestic operations,” said the ratings agency.

Okada Manila is the largest integrated resort in Manila’s Entertainment City — a region where gaming venues have only recently resumed operating following the coronavirus pandemic and are doing so at limited capacity. For now, Okada is only allowing members of its loyalty program and devoted gamblers into the casino.

Okada Manila SPAC Deal Not a Fix

Earlier this year, Universal said it’s looking for a US-based special purpose acquisition company (SPAC) to partner with to bring the Okada Manila business to a US equity exchange, such as the Nasdaq or New York Stock Exchange (NYSE).

Such a transaction could help with the parent company’s liquidity concerns. But it doesn’t account for a possible uptick in COVID-19 cases in the Philippines, which would likely lead to another shutdown of the venue. Nor does the plan factor that blank-check transactions recently fell out of favor, as investors question slack post-deal performance by the target companies.

“UEC believes it has several options to shore up liquidity, such as a potential listing of its Philippine-based casino business or a refinancing. Considerable uncertainty exists over these options because UEC is vulnerable to pandemic-related disruptions,” said Fitch.

Universal announced in February that it’s pursuing a merger for the integrated resort business with a US-based SPAC, and said in late March that it’s mulling several offers. But the company has been quiet on this front for over two months.

Tough Comps for Universal

Based on profitability and regional exposure, Okada Manila is somewhat comparable to Australia’s Crown Resorts and Las Vegas Sands (NYSE:LVS). But those operators are rated “BBB” and “BBB-”, respectively.

“Crown and Sands also operate in more stable regulatory regimes than UEC,” adds Fitch. “The Japanese company’s execution and operational risks are also notably higher than that of Crown and other peers, as UEC has not yet established its position in the junket and high roller segments.”

Analysts expect operators with exposure to the Philippines will see those venues post only modest recoveries later this year before returning to pre-pandemic levels in 2023.

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