Wynn Resorts: Crown Deal The First Step In Multi-Year Financial Restructuring

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About: Wynn Resorts, Limited (WYNN)
by: Michael Boyd
Summary

The Crown Acquisition partnership was on favorable terms, and gives a solid injection of capital for Wynn Resorts.

This likely was done to continue to ramp down leverage as the company prepares for Japanese gambling legalization.

There are many more steps to take; primarily the refinancing of the company's debt that comes due in the early 2020's.

All these steps must be taken to ensure that Wynn Resorts has access to capital and looks financially healthy to the Japanese government.

The retail partnership between Wynn Resorts and Crown Acquisitions likely might be glossed over by many investors. It is easy to do; a $472M deal for a company with a $17B enterprise value seems like just a drop in a pond. The cap rate (4.5-5%) is generally favorable, and Wynn Resorts (NASDAQ:WYNN) ensured (as it always does) that it maintains voting control. Expect Crown Acquisitions to be a very passive partner going forward.

However, this is likely the start of a positioning move for Wynn Resorts. With the Japanese parliament widely expected to approve the legalization of gambling hubs today, given Prime Minister Shinzo Abe's firm backing by parliamentary members in the upper house. This is likely the start of a years-long restructuring initiative, as Steve Wynn and company turn their focus on improving the balance sheet to make the company look as attractive as it can during the bidding process.

Casino Bidding Process

There is more nuance to the casino bidding process than simply submitting plans for a property. Government officials take many facets into account, including the bidder's reputation and financial health. Particularly for the Japanese, there is a clear emphasis on maintaining appearances, and as part of that bidding process, it is guaranteed that Wynn Resorts will have to show that it has both easy access to capital to finance its project, and that it will have no problems operating and maintaining a multi-billion dollar property going forward. For the Japanese, the last thing they would want to have occur is a bankruptcy, reorganization, or other negative event that would have a high likelihood of impacting operations.

Remember, Wynn Resorts held $9.4B in debt at end of Q3 2016; $7.7B net of cash. Assuming $1.7B in property EBITDA for fiscal 2017 (down from guidance earlier this year due to ramp-up issues at Wynn Palace in Macau), this represents 4.5x net debt/2017 EBITDA leverage. While better than the 5.8x leverage found back in 2015, when the company had raised substantially all of the debt necessary to complete Wynn Palace but was getting no earnings contribution from the property, this isn't the prettiest picture when it comes to financial leverage. The situation becomes a little more dire when you consider Wynn Resorts has more than a billion more in capital needs in order to complete its Wynn Boston Harbor project on schedule for a 2019 opening. Any free cash flow the company earns in 2017 and through part of 2018 will likely have to be dedicated to bringing that property online.

Investment Bankers Celebrate

If Wynn wants to be able to compete for the Japanese market, it needs to get its financial house in order. With a price tag on a Japanese property likely to run into the $6B+ range, getting yet another world-renowned property up and running in the early 2020's was not in Steve Wynn's five-year playbook. As a result, the playing board will have to be rearranged a bit.

The company is facing a two-sided battle here: securing new debt to fund massive new expenditures as an already levered company, while also having to deal with the fact that most of its debt will be expiring in the early 2020's and will need to be refinanced and rolled over. On the Wynn Macau side, the senior term loan facility ($2,276M outstanding) comes due in September of 2021, and the Macau revolver ($341M outstanding) comes due in September 2020. Likewise, the 5.25% senior notes ($1,342M) come due in October of 2021.

Wynn America isn't much different, with that entity's senior term loan ($209M outstanding) expiring in November of 2020, a barrage of tranches of senior notes in 2020/2021 ($893M of 5.375% notes, $497M of 4.25% notes), and the $1.9B related party promissory note (long-term shareholders will remember the spat with Kazuo Okada that generated this debt) in February 2022.

While certainly not an immediate need, Wynn Resorts will start to have to think about amending all of these credit facilities on new terms, while also putting together multi-billion dollar refinancings together on the variety of senior notes. All of this needs to be done with the timetable for the Japanese bidding process in mind. Expect this to begin in earnest late in 2017/early 2018 as the company tries to get ahead of some of these issues in preparation for discussions.

Overall, this will likely not be a problem. Steve Wynn has deep ties with Wall Street, and the company's debt issuances in the past have always been oversubscribed. Getting lenders on board has never been difficult, and recent Wynn Palace hiccups aside, Wynn Resorts has always done well from an execution standpoint. This isn't their first rodeo. Nonetheless, investors should expect some financial wheeling and dealing to be done, and should not expect that dividend to be raised back to prior levels anytime soon.

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Disclosure: I am/we are long WYNN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.