The two series of Crown notes (ASX codes: CWNHA, CWNHB) have been put through the wringer since speculation arose in November 2015 of a privatisation bid by the James Packer camp. A privatisation bid was viewed as potentially leading to more highly geared structure, which is generally viewed as being unfriendly to debt holders
The latest announcement by Crown seemed to have put all this concern aside. Crown plans to demerge into two entities with Crown Resorts owning the Australian operations and another yet-to-be named company holding the international businesses. There is also the possibility of a separate property trust being set up to sell a 49% interest in the Casino’s Australian properties.
Westpac summed up a typical reaction. “This provides a positive boost on two levels; firstly, we have a resolution and secondly, we have a resolution that is bondholder friendly.” Evans and Partners view was pretty much the same. “The announced transaction has removed previous downside risk for hybrid holders.”
The yields on both series of Crown notes plummeted on the day as the prices of the two securities rocketed. The day before the announcement, according to Evans and Partners, series I notes (ASX code: CWNHA) and series II notes (ASX code: CWNHB) had trading margins of 8.65% and 10.07% respectively. By the end of the next day, these margins had dropped to 6.59% and 7.43% as investors decided risks associated with the notes needed a re-assessing.
Crown’s presentation of its intended strategy made it clear they had debt holders in mind. When outlining its dividend policy Crown said, “The adoption of this new dividend policy does not alter Crown Resorts’ intention to maintain a strong balance sheet and credit profile…” Apart from this pledge, Evans and Partners’ credit analyst Harry Dudley said the dividend policy “extinguishes any doubt that Crown has a plan to stop paying dividends to then be able to remove coupons on hybrids.” It should be noted that James Packer is said to own around $150m of the series II Crown Notes.
The one negative out of plan was Standard & Poor’s and Moody’s move to place Crown on negative watch. S&P said any downgrade would be limited to one notch. Referring to the rating agencies likely moves Westpac said, “Regardless of the short term rating outcome, this transaction will remove the potential for a significant downward rating move from Crown which will remain supportive of spreads.
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