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Studio City wise to buy out minority: Bernstein

Studio City’s slower than expected ramp up has caused some investor concerns on a potential breach of debt covenants, said Bernstein in a note on Monday.

Whilst Melco Crown’s Studio City does have a margin of safety against a covenant breach the operator would be wise to buy out the 40 percent minority, said the brokerage.

“We believe the most sensible solution is for MPEL to buy out the 40 percent minority interest in Studio City, in order to accelerate the ramp up and achieve an optimal property EBITDA level to fully reduce the risk of a default.”

Studio City has two tranches of debt outstanding on its balance sheet, according to Bernstein - Studio City Project Facility, in the amount of $1.3 billion with maturity in January 2018, and Studio City Note, in the amount of $825 million, with December 2020 maturity.

In late November, Studio City reached an agreement with creditors to amend certain of the covenants on its $1.4 billion facility, which could give the casino resort more room to breathe during operation ramp up.

In a “base case scenario” where Studio City gradually ramps up in 2016-2017, the brokerage said the casino will “still need to draw down at least US$50mm from its Liquidity Account in 1H 2017 in order to meet all four covenant tests,” and is not likely to breach the covenant in this scenario.

However, in the “Stress Test” scenario, Studio City can only withstand a 16 percent reduction in the “Base Case” EBITDA before it starts to run a higher risk of defaulting on its covenants.

“By bringing Studio City into 100 percent ownership, the project could get credit support from the rest of MPEL's operations and Studio City would be more optimally run and should be able to achieve better ramp up and operational results,” Bernstein concluded.

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