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Investing.com -- S&P Global Ratings has revised its outlook on Universal Entertainment Corp. (UE) from stable to negative, while confirming the company’s ’B’ long-term issuer credit rating and ’B’ long-term senior debt rating. The decision comes as the company’s performance in both its domestic gaming machine business and the Philippines’ casino resort operations has significantly underperformed expectations.
Universal Entertainment’s domestic pachinko and pachislot (gaming) machines business, along with its Philippine casino resort business, have been underperforming, leading to less favorable key cash flow ratios than previously expected. The outlook revision reflects the possibility of UE’s financial condition continuing to deteriorate over the next year.
The company’s gaming machine business is expected to face continued downward pressure on earnings. This is largely due to weak compliance with pachinko machine regulations for new models. Despite the company’s efforts to develop new models and secure orders, the recovery of this business remains uncertain. The fiscal 2025 EBITDA for this business is expected to be around ¥11 billion.
In the Philippines, the casino resort business is likely to see only modest improvements in earnings. Slow growth in international tourist numbers and increased competition in the casino resort market have negatively affected UE’s business environment. The company is taking measures such as strengthening non-gaming activities and reducing costs, but the EBITDA for this business is expected to be only around ¥24 billion over the next year.
Universal Entertainment’s consolidated EBITDA is expected to recover from ¥21.2 billion in fiscal 2024 to about ¥29 billion this fiscal year, which is about 70% of the EBITDA recorded in a relatively strong fiscal 2023. However, there is a risk that earnings may not meet expectations, and the recovery may be delayed.
The company’s key cash flow ratios are expected to remain below previous expectations over the next year due to the slow recovery in overall earnings. The company’s debt to EBITDA was expected to improve significantly to less than 5x in the current fiscal year from 8.9x in December 2024. However, this ratio is now expected to recover to only about 6x by the end of December 2025.
As of March 2025, the company’s cash and deposits had significantly decreased, prompting a close examination of the outlook for liquidity recovery. Despite raising a total of US$800 million in long-term bonds and loans in the July-September quarter of 2024, the company’s consolidated cash and deposits decreased significantly to about ¥21 billion at the end of March 2025.
The negative outlook reflects the likelihood of a slower recovery than expected and a deterioration in the company’s key cash flow ratios. The operating environment remains challenging for its flagship gaming machine and casino resort businesses.
S&P Global Ratings will consider a downgrade if the likelihood of any of the following scenarios increases in the next three to six months: the consolidated EBITDA for fiscal 2025 falls below ¥29 billion, consolidated cash and deposits on hand decline from the level at the end of March 2025, or the decline in business performance leads to a breach of financial covenants.
Conversely, the outlook could be revised to stable if the profitability of its mainstay gaming machine and casino resort businesses significantly improves and its debt to EBITDA ratio remains below 5x.
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