Genting bonds signal dividend strain

GENTING Bhd’s latest bond issue signals possible challenges for future dividends.

While it may have lost some appeal as a dividend play among equity investors, its core businesses remain resilient – one reason it continues to have access to funding.

Genting raised US$1.5bil through two tranches of unsecured subordinated perpetual bonds, despite the threat of a credit rating downgrade.

The PerpNC5.5 (perpetual non-call 5.5-year bond) and PerpNC10 (perpetual non-call 20-year bond) tranches carry coupon rates of 7.65% and 8.3%, respectively, and were oversubscribed by more than 2.2 times.

Proceeds will be used to refinance US$1.5bil of senior bonds due in January 2027.

The high yields reflect the risk of the group losing its investment-grade rating as it navigates a heavy capital expenditure (capex) cycle, which could exceed RM8bil annually through financial year 2030 (FY30).

Much of the capex will go towards expanding its gaming projects in Singapore and New York, as well as servicing debt incurred from acquiring shares in subsidiary Genting Malaysia Bhd last year.

Free cash flow is expected to remain negative until at least FY28, according to reports.

Hence, the new perpetual bonds are “covenant-lite, with features such as coupon step-ups (25 basis points if not called at the 10-year mark) and resets every five years after the first call date.

Rising capex and debt obligations mean future dividends payout could remain depressed unless earnings recover at its Las Vegas and Singapore businesses.

A Credit Sights report notes that while the bonds permit coupon deferrals, these are subject to “dividend stoppers”, meaning Genting cannot pay dividends if bondholders are not paid.

The group’s liquidity, however, remains strong, with consolidated cash currently outstripping short-term debt, supporting its ability to raise fresh funding.