Fitch Ratings has assigned Empire Resorts, Inc. a final 'B+' Long-Term Issuer Default Rating (IDR) following the closing of its new senior secured notes and HoldCo loan.
Fitch has also assigned a 'BB+'/'RR1' rating to Empire's senior secured notes. The Rating Outlook is Stable.
The IDR reflects an improved standalone credit profile (SCP) pro forma for the recapitalization. Empires 'b-' SCP is supported by improved financial flexibility and modestly positive forecast FCF generation, offset by its geographic concentration and high leverage. The two-notch uplift from the SCP reflects the moderate linkage to stronger parent, Genting Malaysia (GENM; BBB/Negative). The Stable Outlook reflects the property's recent healthy operating performance and regional gaming's broader solid recovery.
Empire completed a recapitalization that included $300 million of senior secured notes, a new $75 million HoldCo loan, and a $150 million preferred equity investment by GENM.
Key Rating Drivers
Leverage High but Manageable: Fitch forecasts standalone gross rent-adjusted leverage to approach 6x by 2022 (around 7x including HoldCo debt), driven by a more conservative proposed capital structure and a strong recovery in U.S. regional gaming from pandemic-related disruptions. The credit profile should continue to modestly delever through 2024, as FCF generation can support a small level of debt paydown at the HoldCo level. EBITDAR margins have improved sequentially since early 2021, supported by management's privatization cost saving measures, increased win-per-unit-per-day (WUD), and regional gaming's strong recovery.
Transaction Improves Financial Flexibility: The note issuance and preferred equity investment eliminated near-term refinancing risk and funded two debt service reserve accounts. In addition, FCF generation will turn positive in 2022 and provide some additional financial flexibility in the context of Empire's 'b-' SCP.
Empire has low maintenance capex needs, given the property's age, and development capex related to the Orange County (OC) slots-only property will not impact Empire's liquidity profile, as it will be primarily funded from outside the restricted group. Fitch expects FCF to be allocated toward HoldCo debt repayment and increasing liquidity.
Lack of Diversification: Empire operates a single property, Resorts World Catskills (RWC), in a competitive market that could be subject to new supply in the medium term. Single-site casino operators are typically rated on the low end of speculative grade, though some can achieve higher ratings if they are in well-protected, monopolistic type regulatory environments and have very low leverage. Empire could become more diversified with its second slots-only casino license slated for the nearby Orange County, NY (OC, to open during 2022). However, given the geographic proximity of OC the ratings benefit from opening the additional casino will be somewhat limited.
Competitive Pressure Tempers Potential: RWC is located approximately 90 miles from New York City, and the immediate area around the casino is remote relative to the size of resort. RWC competes with Atlantic City, NJ, eastern Pennsylvania, New York City area slots-only properties and Connecticut tribal casinos for New York metro area customers. The competitive landscape makes significant, long-term growth in gaming revenues unlikely. Additionally, New York State can consider incremental downstate full-scale licenses beginning 2023, which could, in turn, increase political momentum to try and expand gaming in New Jersey again.
Genting Relationship Positive: Fitch views Empire's association with Genting Malaysia (BBB/Negative) positively and believes it warrants a two-notch uplift from the 'b-' SCP under Fitch's 'Parent and Subsidiary Rating Linkage Criteria.' The bottoms-up approach focusing on the SCP differs from other Genting-owned entities that are equalized with the parent's rating. This is primarily due to Genting not wholly-owning Empire Resorts, as Kien Huat (the investment vehicle of the Lim family that controls Genting) owns 51% and controls Empire. In addition, Fitch views RWC as having less strategic value than other wholly owned Genting properties, which are generally large-scale flagship assets that generate materially greater cash flow.
However, RWC does have strategic value, given Genting's reputational risk with global gaming regulators. The property is managed by the same team as Resorts World New York and shares the same brand. The two-notch uplift is also reinforced by demonstrated financial support from both Kien Huat and Genting, mainly through preferred equity investments, to ensure the prior capital structure's debt was serviced during initial operating weakness and to recapitalize the entity at a more conservative level than previously contemplated.
Derivation Summary
Empire's SCP is consistent with most other single-site casino operators, which are typically on the lower end of speculative grade. The SCP reflects Empire's geographic concentration in a competitive environment subject to new supply risk in the medium term. The SCP also reflects high adjusted leverage, though more manageable under the new capital structure, and a weaker FCF profile than its regional gaming peers.
Fitch treats the HoldCo debt as debt of the rated entity, due to potential enforcement of a share pledge triggering a Change of Control at the rated entity level. Pro forma for the recapitalization, liquidity and refinancing risk are no longer be material concerns, which partially drove Empire's previous lower SCP.
Key Assumptions
Fitch's Key Assumptions Within The Rating Case for the Issuer:
Fitch's assumptions build off a normalized, run-rate net revenue of about $310 million for RWC, supported by managements post-privatization initiatives and the recovery in U.S. regional gaming. This level of revenue is achieved during fiscal 2022, with fiscal 2021 lower given the lingering pandemic disruption in 1H21 (though this began abating during 2Q21). Total revenue increases toward $400 million in 2023, which includes the first year of operations of the Orange County slots-only property (Fitch assumes about 20% cannibalization to RWC);
EBITDAR is $40 million in 2021, though margins reach 20% in the back half of 2021. EBITDAR margins increase toward low-20% by 2022 thanks to a large number of cost savings associated with taking Empire private, as well as a rationalization of the labor pool post-pandemic;
Rent is roughly $20 million per year and increases slightly after Orange County property opens;
Maintenance capex is minimal given RWC's age. Capex related to the OC license is funded outside of the restricted group;
FCF is allocated toward paying down the HoldCo note and building additional financial flexibility;
Fitch does not include any potential benefits from online sports betting at this time.
RECOVERY ASSUMPTIONS
The recovery analysis assumes that Empire Resorts would be reorganized as a going-concern in bankruptcy rather than liquidated. Fitch has assumed a 10% administrative claim and there is no revolver in the capital structure.
Going-concern EBITDA of roughly $40 million is less than Fitch's 2022 estimates, which incorporates some degree of operating stress that would cause a default scenario from sustained negative FCF. This level of EBITDA is representative of margins in the mid-teens, given New York's high gaming taxes and the competitive nature of Empire's addressable market.
Since Resorts World Catskills opened in 2018, there is limited historical performance to analyze. This EBITDA is slightly higher than the previous going-concern EBITDA used in mid-2020 given the now realized cost-cutting from management's initiatives and incremental reduction in VLT gaming taxes for RWC.
Fitch applies a 6.0x EV/EBITDA multiple, which reflects the intense competitive environment, limited track record of operations, fixed rent costs, and less established player database relative to larger, regional peers. This is balanced by the property's younger age and quality, having opened in 2018. Typically Fitch will assign 5.5x-7.0x multiples to regional gaming companies depending on diversification, competitive environment, asset quality, and existence of meaningful leases.
Fitch also includes roughly $70 million in additional value for the OC slot-only casino license. Since the property is not yet built, we value the license under a conservative set of assumptions as follows: 1,200 slots; $180 win per unit per day (WUD, conservative relative to Fitch's base case); 15% EBITDA margins, 6.0x EV/EBITDA multiple. The WUD assumptions are characteristic of a regional casino in a saturated market and are below Fitch's base case assumptions for the OC property. The margin assumption takes into account the high gaming tax associated with slot-only licenses.
Fitch forecasts a post-reorganization enterprise value of roughly $315 million, after the deduction of expected administrative claims of 10%. This results in a 91%-100% recovery band for the senior secured notes, which equates to +3 notching from the IDR to 'BB+'. Given the structural subordination of the HoldCo debt, it does not impact the recovery analysis of the Empire senior secured notes.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Geographic diversification away from greater New York City;
Reductions in adjusted debt/EBITDAR toward 5.0x (includes HoldCo debt);
FCF margin exceeding 10%;
An increase in rating linkage with Genting Malaysia;
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Adjusted debt/EBITDAR sustaining above 7.0x (includes HoldCo debt);
FCF margin approaching 0%;
A decrease in rating linkage with Genting Malaysia;
A material reduction in financial flexibility.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Liquidity and Debt Structure
Empire has roughly $90 million in cash following the secured note issuance, which includes roughly $50 million in two debt service reserve accounts. This is sufficient in the context of marginally positive and growing EBITDA generation and minimal maintenance capex needs. The high initial excess cash balances offset the lack of a revolving credit facility.
Fitch forecasts FCF to be marginally negative in 2021 and become slightly positive thereafter. Some growth capex remains associated with the golf course in 2022, though this is manageable. Capex related to the OC project will be incurred outside of the restricted group. Fitch assumes management allocates FCF toward paydown of the HoldCo loan (within the limits of final documentation's restricted payment carve-outs) and build additional financial flexibility as it works toward its target of being in a net cash position. There are no maturities until 2024.
Issuer Profile
Empire Resorts, Inc. owns and operates Resorts World Catskills (RWC), a full-scale casino located roughly 90 miles outside New York City. The company is in the process of relocating its prior video gaming machine (VGM, aka slots) license from Monticello, NY to Orange County, NY.
Summary of Financial Adjustments
Fitch adds back non-recurring items to EBITDA. Fitch also includes HoldCo debt in its leverage calculation as it is considered debt of the rated entity per Fitch's criteria.
ESG CONSIDERATIONS
The highest level of ESG credit relevance, if present, is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or to the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
Date of Relevant Committee
08 October 2021
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
RATING ACTIONSENTITY/DEBT RATING RECOVERY PRIOR
Empire Resorts Inc. LT IDR B+ New Rating B+(EXP)
senior secured
LT BB+ New Rating RR1 BB+(EXP)
VIEW ADDITIONAL RATING DETAILS
Additional information is available on www.fitchratings.com
GENTING MALAYSIA 
