Enjoy S A : Fitch incrementa rating de Enjoy a 'CCC'

RATING ACTION COMMENTARY

Fitch Upgrades Enjoy S.A.'s Ratings to 'CCC'

Mon 05 Oct, 2020 - 4:13 PM ET

Fitch Ratings - New York - 05 Oct 2020: Fitch Ratings has taking the following rating actions on Enjoy S.A. (Enjoy):

--Foreign Currency Issuer Default Rating (IDR) upgraded to 'CCC' from 'D';

--USD195 million senior notes due in 2022 downgraded to 'D' from 'C'/'RR4' and withdrawn;

--New USD194 million tranche A notes due in 2027 assigned a 'CCC+'/'RR3' ratings;

--New USD16 million tranche B notes due in 2027 assigned a 'CC'/'RR6' ratings.

The upgrade to 'CCC' reflects Enjoy's successful debt restructuring process, which results in approximately 50% of the company's debt being converted into capital, and an extension of the amortization of its remaining capital market debt, which will result in no significant payments until 2027, and PIK during the first two years. This new structure reduces pressure on the company's liquidity as it recovers from pandemic-related closures, and restructures its operations to comply with new government mandated safety measures.

The 'CCC' rating reflects the uncertainty in the timing of the opening of the casinos and hotels, expectations of low capacity utilization levels during the next 12 to 18 months, the impact of the pandemic on customers' spending behavior, and the still weak capital

structure. The ratings consider Enjoy's position within the local industry, where it is the largest player in terms of number of casinos and revenues, and its ownership of one of the largest casinos in Latin America in Punta del Este.

USD195 million senior notes due in 2022 has been withdrawn as it was exchanged for the new notes under the debt restructuring process Enjoy filed for.

KEY RATING DRIVERS

Debt Restructuring Process: Enjoy agreed, with its international bond holders, to exchange its existing bond for new bonds with reduced coupons and an extended maturity profile. The company has also agreed with its local creditors to exchange its existing debt for new bonds, most of which will be converted to equity. As part of this process, Enjoy has received additional financing for CLP50 billion to cover its current expenses, which will be paid through the issuance of a convertible bond in early 2021. At the conclusion of the restructuring, approximately 50% of the debt the company held prior to filing for bankruptcy protection will have been converted to equity.

Casinos Still Closed: Authorities in Chile, Uruguay and Mendoza closed all of Enjoy's casinos during March due to pandemic-related concerns. These casinos are still closed, and it remains uncertain when they will open or what specific measures they will have to take to begin operations, which may include limiting the amount of people in the site, or only allowing players in open spaces. Fitch estimates that in a scenario of total close down, the company burns out approximately CLP5 billion a month.

Slow Recovery Expected: The gaming business in Chile is mature, with low-single-digit revenue growth, and as such, the recovery is expected to be slow. Coupled with this, the regional economy has been highly affected by the pandemic, increasing unemployment and reducing GDP growth, which will hinder the company's ability to return to 2018 cash flow generation figures, prior to the pandemic and the social unrest that occurred at the end of 2019. Enjoy's growth strategy is focused on developing underdeveloped locations, such as in Santiago and Chiloe, as its other casinos post modest growth. Punta del Este is also affected by the travel restrictions, as a material portion of its revenues come from high end international players.

High Credit Risk: Enjoy's 'CCC' rating reflects its high leverage and uncertainty regarding the shape of the industry recovery post pandemic, as well as the uncertainty of when the company will open its casinos. Fitch projects that even after the restructuring process is completed, Enjoy will maintain a high leverage of over 7x, based on Fitch's expectation that margins will decrease, due to new safety regulations and start of the new licensing agreements that impose a higher tax on the company.

Committed Capex: Enjoy has committed capex related to municipal licenses of approximately CLP 60 billion between 2020 and 2022. This timeframe was extended due to the lockdowns and Enjoy's inability to continue its construction projects. In addition, the regulator has opened the bidding process for licenses expiring in 2023 and 2024, of which Enjoy operates two. Enjoy's participation in this bidding process, and the possibility of applying for more licenses, will add capex requirements, further reducing the company's deleverage capacity in the rating horizon.

DERIVATION SUMMARY

Enjoy's 'CCC' IDR is lower than other small casino operations in the Americas. Enjoy's leverage is expected to exceed 7.0x even after the pandemic and debt restructuring. The company has lower margins than much larger operators, such as Boyd Gaming Corporation, MGM Resorts International (BB/Stable) and Wynn Resorts Ltd. Enjoy's business was disrupted by the pandemic, and it is uncertain how the operational metrics will behave once the casinos are reopened.

Enjoy derives 70% of its EBITDA from Chile, and is present only in Latin America. Additionally, after continuous years of financial stress, the company needs to devote capex to revitalize its asset base. Enjoy owns all of its underlying real estate, with the exception of Vina del Mar, Chile, which may provide financial flexibility in case of needs, either as collateral or asset sales.

KEY ASSUMPTIONS

Fitch's Key Assumptions Within its Rating Case for the Issuer

--Casinos start to gradually reopening by the end of 4Q20;

--Capex of CLP90 billion for the 2020-2022 period, including mandatory investments in municipal licenses;

--Slow grow on demand for 2021, due to the additional restrictions to avoid contagion and the affected economic environment;

--New municipal licenses opening postponed until 2022.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

--Adjusted Debt/EBITDA below 6.0x on a consistent basis; --FFO fixed charge coverage above 1.5x.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

--Expectations that the company will not be able to meet its short-term commitments; --Liquidity ratio consistently below 1x.

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