Crown Resorts this year have been the subject of strong rumours which have pushed up the yield on its subordinated notes. The rumours suggest the James Packer is investigating the possibility of privatising the company. The company has not responded to rumours and the price of the Crown notes has remained depressed with yields pushed higher.
Crown Notes I (ASX code: CWNHA) have a running yield of 7.82% and a yield to maturity 12.51% while the Notes II (ASX code: CWNHB) have a running yield of 6.64% and a yield to maturity of 11.82%, according to Michael Saba from Evans and Partners. (Yield to maturity on a perpetual security which may never be redeemed can often be a misleading number so care should be taken using that metric alone.)
A privatisation scenario suggests the company would take on more debt and the share price would rise. Equity holders would be pleased but it is potentially bad for debt holders as a more indebted company is a riskier proposition. The cost of protecting Crown debt against default has increased by more than 100% to 287 basis points in the 12 months to the start of May. This represents the largest rise in the 25-member Markit iTraxx Australia index of credit default swaps.
All of which makes the company’s move this week to offload just over $1 billion of Melco-Crown Entertainment joint venture shares in Macau very interesting indeed. The company has stated the funds will be used to pay down debt although it may throw some in shareholders’ direction. It has said it will “maintain a strong balance sheet and credit profile to fund existing Australian development projects”. Mr Saba has called the move a “clear credit positive” for Crown.