Fitch Ratings has revised the outlook for Australia’s Crown Resorts from stable to negative, reflecting what it describes as a weak governance structure and concerns over potential outcomes of multiple inquiries into its operations that could include substantial fines, increased regulatory oversight or loss of licenses.
The negative outlook follows recent fallout from an ongoing inquiry by the NSW Independent Liquor & Gaming Authority into Crown’s suitability to hold a casino license for soon to open Crown Sydney, and the news that two more regulatory inquiries have been opened in Victoria, home of flagship property Crown Melbourne.
Crown has promised substantial changes to its board after shareholders made their dissatisfaction known at the company’s Annual General Meeting last week.
In a Monday note, Fitch pointed to “weaknesses in Crown’s governance structure that were revealed during an inquiry in New South Wales, as well as the risks to Crown’s operations and financial profile from potential outcomes of the various inquiries, which could include fines, changes in operating conditions and regulations, or changes to or loss of licences.”
The agency has maintained Crown’s Long-Term Issuer Default Rating (IDR) at BBB but said it would also consider a downgrade “should the regulators impose onerous regulatory conditions or fines or penalties that have a significant impact on the company’s business or financial profile.
“Under our base case,” Fitch proposed, “Crown would be able to absorb around AU$800 million in fines and penalties such that its financial profile remained consistent with its rating. If this were to materialise, it would be among the largest fines imposed on a corporate in Australia.
“Alternatively, the most severe regulatory action would be loss of licence. We believe there is low probability of this event, and hence have captured the risks under the Negative Outlook.”
While Fitch stated that its outlook for Crown will only turn positive only it fulfils promises to address deficiencies in its internal control structure, the agency noted the company’s BBB IDR rating was a nod to its strong financial profile and exposure to strong domestic gaming markets.
“We believe Crown’s Melbourne and Perth properties, which accounted for over 90% of revenue since FY18, will continue to benefit from predictable local markets and Crown’s position as each region’s sole licensed casino operator,” Fitch said.
“Border restrictions in place to combat COVID-19 will see VIP revenues remain low over the foreseeable future. Nevertheless, this volatility has a minimal effect on the group’s overall results, because VIP revenue made up less than 25% of normalised group revenues from FY16.”
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