Fitch, a renowned ratings agency, has placed Japan’s Universal Entertainment Corp under scrutiny by placing it on Ratings Watch Negative (RWN). This move comes as the maturity of its substantial US$760 million notes due in December 2024 looms closer. Universal Entertainment Corp, a prominent player in the pachinko and pachislot supply industry and the parent company of the Philippines’ integrated resort, Okada Manila, faces a critical juncture as it strives to manage its debt obligations amidst operational challenges.
Refinancing Endeavors:
Universal’s fate hinges significantly on its ability to refinance the bulk of its debt represented by the US$760 million notes. Fitch reveals that while the company has progressed into the advanced stages of a refinancing plan, the substantial debt maturity poses a significant challenge relative to the company’s liquidity and cash flow position. Although the refinancing plans seem promising, execution risks remain a pertinent concern.
Operational Performance and Revenue Outlook:
Fitch’s assessment of Universal’s operational performance reveals a mixed picture. While the non-VIP segment has exhibited resilience and consistent earnings, a slowdown in revenue growth, particularly in the VIP gaming segment, has dampened overall prospects. Fitch has revised down revenue forecasts for Okada Manila due to weaker performance in recent quarters. Despite these challenges, the outlook for the integrated resort remains positive, buoyed by the Philippines’ robust economic growth and ongoing recovery in visitation rates.
Universal’s revenue streams are diversified across its pachinko, pachislot, and integrated resort segments. While sales in the pachinko and pachislot segment have remained stable, Fitch points out the company’s limited operating scale, which constrains its credit profile. Over half of Universal’s earnings before interest, taxes, depreciation, and amortization (EBITDA) stem from its single casino asset in the Philippines, posing concentration risks. Moreover, long-term growth prospects in the domestic pachinko/pachislot market appear bleak, further challenging Universal’s business profile.
Financial Outlook and Free Cash Flow Generation:
Despite operational challenges, Fitch expects Universal to sustain positive free cash flow in the near term. This optimism is underpinned by steady earnings, reduced capital expenditure requirements, and the absence of significant investment plans. With major construction completed at Okada Manila, capital expenditure on the integrated resort is anticipated to remain modest. Furthermore, Universal’s prudent control over shareholder remuneration activities aligns with its business performance and debt covenants.
Universal Entertainment Corp faces a pivotal moment as it navigates debt refinancing amidst operational headwinds. The company’s ability to successfully refinance its substantial debt obligations and overcome challenges in its various business segments will be critical for its future financial health and stability. While risks loom large, prudent financial management and a focus on optimizing operational efficiencies offer a glimmer of hope in an otherwise challenging landscape.