KCC Korea casino plan credit negative, Moody’s says

KCC Corp’s plan to team up with U.S. tribal operator Mohegan Sun on a casino venture in South Korea is credit negative for the company, ratings firm Moody’s says.

KCC, a Korean industrial paints and chemicals company, is planning to invest KRW204 billion ($178 million) for a 24.5 percent stake in Inspire Integrated Resorts, Mohegan’s local unit, which has its eyes set on a casino license in Incheon.

“KCC’s investment in the casino business, if it materializes, will be credit negative, given the casino project’s uncertainty and execution risk,” says Wan Hee Yoo, a Moody’s vice president and senior analyst.

However, the decision will not immediately affect the company’s Baa2 issuer rating and stable outlook, as there is still uncertainty as to whether the project will receive government approval.

This equity injection remains subject to the government’s approval on the casino project, which is expected to be finalized over the next three months.

The investment in the casino business, if it materializes on a debt-funded basis, will pressure KCC’s financial profile, Moody’s said.

As a result, absent any deleveraging activities, Moody’s expects the company’s adjusted debt/EBITDA to rise to about 3.5x-3.7x by 2016 from 2.4x in 2014 and retained cash flow/net debt to be around 30 percent compared with the previous net cash position.

The South Korean government is offering two licenses to run integrated resorts in the country and initially 34 parties threw their hats into the ring.

However, earlier this month, Nagacorp and Grand Korea Leisure said they were pulling out of the running on concern the project may not be economically viable. South Korea does not permit locals to gamble making the casinos highly reliant on foreign visitor arrivals.