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Moody's Upgrades Melco Resorts Credit Outlook After Strong Q3

Moody's Investors Service has upgraded the credit rating outlook for Melco Resorts & Entertainment (NASDAQ: MLCO) from "negative" to "stable" following the company's impressive third-quarter performance.

Moody's Upgrades Melco Resorts Credit Outlook After Strong Q3

This shift is attributed to the robust recovery in the gaming market in Macao SAR, China, a crucial market for Melco. Despite maintaining its current junk rating of "Ba3," Moody's anticipates a substantial improvement in Melco's earnings before interest, taxes, depreciation, and amortization (EBITDA) over the next 12-18 months.

The ratings agency projects Melco's EBITDA to reach $900 million this year and increase to $1.4 billion by 2024, surpassing earlier forecasts of $700 million and $1.2 billion, respectively. Melco's financial resilience is underscored by its substantial cash position, with $1.2 billion in cash at the end of Q3, excluding restricted cash. This robust liquidity, when compared to its $3.1 billion market capitalization, suggests that the market may not be fully recognizing the company's financial strength.

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Crucially, this ample liquidity positions Melco well to service its liabilities well into the future, a critical factor given the heightened debt burden on Macau concessionaires due to the COVID-19 pandemic. It's noteworthy that Melco has no debt maturing before 2025. Moody's acknowledges Melco's high-quality assets and the promising long-term growth potential in Macau as supporting factors for the company's credit rating.

While the current rating remains in the junk territory at "Ba3," potential future upgrades hinge on sustained earnings growth and a reduction in debt-to-EBITDA ratios. To attain investment-grade status, Melco would need to drive this ratio down to 4.5x to 5x. Moody's emphasizes that any downgrade risks could arise if Melco's adjusted debt/EBITDA surpasses 5.5x-6.0x on a sustained basis or if liquidity weakens due to a weaker-than-expected earnings recovery, failure to reduce debt, or an overly aggressive financial policy.

Melco Resorts & Entertainment operates several iconic properties in Macau, including City of Dreams, Morpheus, Studio City, and Altira. The company's improved outlook follows a series of positive developments, highlighting its resilience and potential for future growth in the dynamic gaming industry.



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