Genting’s high-stakes double-edged win

EQUITY and debt analysts usually share similar views on companies they rate – but not always.

The case of Genting Malaysia Bhd (GenM) is a good example of how these views can diverge.

Following GenM’s win of a full-fledged casino licence in New York, equity analysts were positive, deeming the location an untapped market with strong potential.

However, one debt analyst has cautioned that GenM and its parent, Genting Bhd, face the risk of rating downgrades stemming from Genting’s high debt and weak cash flows.

One key issue is that Genting seems to have spent more than expected in its buyout plan for GenM, pushing its leverage and cash flow metrics beyond the downgrade thresholds set by Moody’s and Fitch.

Then comes the full-fledged New York casino licence that GenM won this week.

GenM’s planned US$5.5bil spend on this will be largely debt-funded and front-loaded, raising concerns of over-leverage. Notably, MGM Resorts withdrew its application for the same licence, citing unfavourable economic assumptions and the shortening of the licence term from 30 years to 15 years – a red flag that GenM should not ignore.

Perhaps the silver lining here is that with GenM committing one of the largest capital expenditure amounts, it may qualify for a longer licence duration.

Some analysts argue that since GenM already operates a limited casino there, a full-service licence will boost its earnings.

But this early-mover status may not translate into a lasting advantage.

GenM may end up spending heavily on marketing to build the market, effectively doing the proof-of-concept work that later entrants can benefit from more cheaply.

Not to mention, the broader gaming sector is also softening, with moderating growth in Las Vegas and Macau and rising competition from online gaming.

Against this backdrop, the New York licence may prove to be a double-edged sword: a strategic milestone, but one that exposes GenM and Genting to higher debt burdens, tighter credit scrutiny and a market whose long-term economics remain uncertain.