Fitch Places Universal Entertainment on Rating Watch Negative as debt maturity looms

Ratings agency Fitch has placed Japan’s Universal Entertainment Corp – a leading pachinko and pachislot supplier and parent company of Philippines integrated resort Okada Manila – on Ratings Watch Negative (RWN) as the maturity of its US$760 million notes due December 2024 draws closer.

The notes comprise the bulk of Universal’s debt and Fitch said it will resolve the RWN if the company successfully refinances its debt.

According to the ratings agency, although a refinancing plan is currently in the “advanced stages”, the debt maturity is substantial relative to Universal’s liquidity and cash flow profile.

“Universal has demonstrated to Fitch that it is in advanced stages of refinancing the US$760 million notes,” Fitch said. “Its plans appear reasonable, particularly given the company’s quality assets and improved cashflows. However, execution risks remain.”

Amid the agency’s concerns are a slowing in revenue growth in 2024 before rising moderately in 2025, with Fitch revising down its forecast for revenue from Okada Manila due to a weaker performance from the VIP gaming segment in 4Q23 and 1Q24. That’s despite overall prospects for the IR remaining positive, “underpinned by the Philippines’ healthy economic growth and continued recovery in visitations.”

Fitch noted that its non-VIP segment “remained resilient and recorded consistent earnings during 1Q24.”

Although sales in the company’s pachinko and pachislot segment have remained consistent, Fitch added, “Universal’s credit profile remains constrained by its limited operating scale. Universal’s 2023 revenue of JPY179 billion (US$1.15 billion) remains significantly smaller than the reported revenues of rated gaming peers.

“Over half of Universal’s EBITDA is from its IR operation, comprising a single casino asset in the Philippines, which presents heightened concentration risk. Furthermore, Universal’s business profile is weighed down by bleak long-term growth prospects in the domestic pachinko/pachislot market.”

Fitch added, “We expect Universal to sustain positive free cash flow (FCF) generation in the near term, driven by steady earnings, reduced capex requirements and the absence of material definitive investment plans.

“With the major construction work at Okada Manila completed, Universal’s capex on the IR is likely to remain modest. We also believe Universal’s shareholder remuneration activities should continue to be prudently controlled in accordance with business performance as well as debt covenants.”