Key Takeaways
- We view exposure to social risk in credit ratings to be above average for leisure companies compared to other industries, with safety risks or perceived travel threats posing the biggest credit risk across many leisure sectors.
- Regulatory changes to address social concerns about gaming can introduce profit volatility.
- We view exposure to environmental risks to be below average compared to other sectors for most leisure issuers, and they primarily relate to extreme weather.
- However, cruise operators face higher environmental risks because of their heavy fuel use and increasing environmental regulations.
- Governance factors can influence regulators' licensing decisions for gaming companies.
Analytic Approach
Environmental, social, and governance (ESG) risks and opportunities can affect an entity's capacity to meet its financial commitments in many ways. S&P Global Ratings incorporates these considerations into its ratings methodology and analytics, which enables analysts to factor in short-, medium-, and long-term impacts--both qualitative and quantitative--to multiple steps of their credit analysis. Strong ESG credentials do not necessarily indicate strong creditworthiness (see "The Role Of Environmental, Social, And Governance Credit Factors In Our Ratings Analysis," published Sept. 12, 2019).
Our ESG report cards qualitatively explore the relative exposures (average, below, above average) of sectors to environmental and social credit factors over the short, medium, and long term. For environmental exposures, chart 1 shows a more granular listing of key sectors and (in some cases) subsectors reflecting the qualitative views of our analytical rating teams. This sector comparison is not an input to our credit ratings and not a component of our credit rating methodologies; it is based on our current qualitative, forward-looking opinion of credit risks across sectors.
In addition to our sector views, this report card lists ESG insights for individual companies, including how and why ESG factors may have had a more positive or negative influence on an entity's credit quality compared to sector peers or the broader sector. These comparative views of environmental and social risks are qualitative and established by analysts during industry portfolio discussions, with the goal of providing more insight and transparency.
Environmental risks we considered include greenhouse gas (GHG) emissions, including carbon dioxide, pollution, and waste, water and land usage, and natural conditions (physical climate, including extreme and changing weather conditions, though these tend to be more geographic/entity-specific than a sector feature). Social risks include human capital management, safety management, community impacts, and consumer-related impacts from customer service and changing behavior to the extent influenced by environmental, health, human rights, and privacy (but excluding changes resulting from broader demographic, technological, or other disruptive industry trends). Our views on governance are directly embedded in our rating methodology as part of the management and governance assessment score.
The list of entities covered in this report is not exhaustive. We may provide additional ESG insights in individual company analyses throughout the year as they change or develop, with companies expected to increasingly focus on ESG in their communication and strategy updates.
Social Exposure
We view exposure to social risk in credit ratings to be above average for leisure companies compared to other industries. Social cohesion-related event risk and product safety risks are the biggest risks facing the global leisure sector. Terror attacks, geopolitical unrest, and health scares can have a significant negative impact on travel demand and leisure activities, though travel demand tends to shift to alternative markets and eventually recover once fears subside. Events that could affect ratings are those similar in scope and longevity to the aftermaths of Sept. 11, 2001; multiple European terror attacks in 2015 and 2016; and periodic flu pandemics over the past two decades. The effects can be particularly strong if the event coincides with an otherwise weak economy, or for companies with significant cash flow concentrations in markets experiencing these types of events or exposed to visitation from those markets.
Even though they're rare, engine room fires and other fatal catastrophes on board cruise ships, as well as fatal accidents in several theme parks around the world, illustrate a significant safety risk. Toy and other leisure goods manufacturers face severe reputation and product liability risks when accidents harm consumers. Social media posts highlighting negative travel experiences can quickly present a brand problem. Cyberrisk and concerns about customer data privacy are increasingly relevant across many leisure sectors, given both the amount of customer and payment data that operators collect and sometimes store in loyalty programs, as well as increasing data privacy regulations.
Finally, the gaming industry's exposure is significant, given the potential for increased regulations to protect local communities from the perceived harmful effects of gambling. This can periodically introduce revenue volatility and impair profitability. Regulations include advertisement bans, smoking bans, caps on betting amounts, restrictions on the number of machines per area and minimal distance between machines, entrance fees for local customers, and visa restrictions to limit the number of trips a customer can make to a market.
Environmental Exposure
We view exposure to environmental risks to be below average compared to other sectors for most leisure issuers. The most relevant environmental risks are climate-related, because unfavorable weather patterns and extreme weather can dampen visitation and, therefore, hurt revenue and damage or even destroy assets. These types of weather events are most relevant for leisure companies with limited geographic diversity or a concentration of cash flows in locations more prone to these types of events. Still, the effect of these events is often temporary, and leisure companies typically maintain sufficient property and business interruption insurance to mitigate losses. Emissions and other waste and pollution regulations have a small-but-meaningful impact on a subset of leisure operators, especially leisure goods manufacturers and cruise operators.
We view the cruise industry's environmental impact as more material than other leisure companies' because of its heavy use of fuel, which creates greenhouse gas emissions. Cruise operators are subject to increasingly complex environmental regulations, including the 2020 global cap on sulfur content of marine fuels. Regulations can increase costs and heighten investment spending to develop more fuel-efficient or environmentally friendly ships, or to add technology to reduce the sulfur content of emissions; failure to adhere to environmental rules can result in fines. Furthermore, ship accidents can result in environmental damage that can impair operators' brands and potentially limit their ability to operate in certain markets.
Governance
Governance typically is specific to the issuer. At the sector level, however, governance factors play an important role in regulators' licensing decisions for gaming companies. This is because gaming is a heavily regulated industry that requires companies, management, board members, and significant equity owners to be found suitable to secure and maintain gaming licenses. Failure to adhere to licensing suitability standards, anti-money laundering regulations, entrance restrictions, smoking laws, and other regulations can lead to fines or, in the most severe instances, license revocation. Severe regulatory infractions can have a material impact on a gaming company's competitive position, which in turn can affect our ratings on it.
ESG Risks In Gaming, Lodging, Cruises, And Leisure
| Company/Rating/Comments | Analyst | |
|---|---|---|
| Accor S.A.(BBB-/Stable/A-3) | ||
| Of all risks, Accor is most exposed to cyberrisk through its distribution platform. The most significant long-term cyberrisk is a breach that establishes a pattern that hurts Accor's reputation if it shakes its guests' confidence in the security of their personal information. In addition, multiple hotel data breaches over the past decade have mostly targeted consumer payment information, but they occasionally target even more sensitive identity data such as national ID and passport information. While we believe hotel companies typically invest substantial amounts of money toward detection and prevention efforts, we have limited visibility into how cyber risks will evolve. Accor's ESG risk exposures also relate to terror attacks, geopolitical unrest, and health scares that temporarily have a significant negative impact on travel demand and financial performance. However, Accor is increasing its geographic footprint alongside brand and segment diversity, with a strong presence in Europe and the Middle East. Geographical diversification frequently mitigates regional events because travel demand tends to shift to alternative markets and eventually recover once fears subside. | Hina Shoeb | |
| Affinity Gaming (B-/Stable/--) | ||
| Affinity could be more vulnerable to extreme weather events than the broader leisure industry if climate change contributes to increased flood risk, given its cash flow concentration in the Midwest and some of those properties' exposure to river floods. Two of Affinity's three Midwest casinos are located on or adjacent to rivers. As a result, these properties can experience significant flooding events--as they did in 2019--which can result in extended property closures, temporary cash flow volatility, and lower ratings, particularly if they occur at a time when credit measures are already weak. Although Affinity has insurance to cover lost business and property damages, there can be lags in collecting these proceeds compared to the period in which cash flow is disrupted, and they may not fully recoup lost cash flow. Furthermore, these events can depress the local economy, and recovery time for both patrons and the property vary. Affinity also faces significant social and governance risks as a highly regulated gaming operator. Compliance with gaming regulators and the company's ongoing ability to meet regulators' suitability requirements are critical to its continued operation. Affinity could incur fines or license revocation if it doesn't meet licensing requirements. However, Affinity has so far not faced any fines or license-related issues that have hurt its competitive position or credit measures. | Ariel Silverberg | |
| Alterra Mountain Co.(B/Stable/--) | ||
| Alterra could be more vulnerable to extreme weather events than the broader leisure industry if rising average temperatures reduce snowfall and hurt visitation, revenue, and EBITDA. Because the company generates the majority of its revenue during the winter months, poor snowfall as a result of environmental risk factors can pressure visitation at Alterra's mountain ski resorts, particularly in regions that have relatively high variability of snowfall from year to year. Fixed costs are significant in the resort business, therefore negative operating leverage can be impactful during periods of poor snowfall. The use of snow-making machines could somewhat mitigate the effect of poor snowfall, though such machines introduce water usage and sustainability-related burdens. Alterra's geographically diversified portfolio of ski resorts, as well as a multiresort season pass product that somewhat moderates seasonality, could help mitigate weather-related risks. | Jing Li | |
| Boyne USA Inc.(B/Stable/--) | ||
| Boyne could be more vulnerable to extreme weather events than the broader leisure industry if rising average temperatures reduce snowfall and hurt visitation, revenue, and EBITDA. Only a modest fraction of Boyne's total revenue comes from non-ski-related activities. Additionally, a significant majority of annual revenue is earned in the winter months, when poor snowfall can pressure visitation. Boyne's largest asset, Big Sky, generates about 20%-25% of total revenue, therefore the company has significant geographical concentration of EBITDA and potential environmental risks at a single asset. Recent investments in non-ski-related amenities, snow-making machines, and some geographic diversification could help mitigate weather-related risks. | Jing Li | |
| Buena Vista Gaming Authority(B-/Stable/--) | ||
| BVGA has more exposure to environmental risks than other leisure peers, given its reliance on a single asset located in Amador County, Calif., which is highly vulnerable to natural hazards, particularly wildfires. These types of extreme weather events can dampen visitation (and thus, revenue), lead to property closure, and damage or even destroy a casino. Regional casinos, such as BVGA's Harrah's Northern California, rely heavily on the economic health of customers in the surrounding area, which drives visitation and gaming spend. Natural disasters can weaken regional economies and hurt local discretionary spending. Although depressed visitation and spending may be temporary and losses may be partially offset by property and business interruption insurance proceeds, the recovery time and collection of insurance proceeds vary. Furthermore, the proceeds may not be sufficient to fully recoup lost cash flow. | Ariel Silverberg | |
| Carnival Corp.(A-/Negative/A-2) | ||
| The cruise industry, including Carnival, is more exposed to environmental risks than the broader travel and leisure industry because of ship emissions; increasing environmental regulations and complexity, including the 2020 global cap on sulfur content of marine fuels; and potential environmental damage that could result from a ship accident. Although Carnival has occasionally incurred fines for not fully complying with environmental rules and regulations, these costs have not materially increased financial risk. Carnival has taken steps over the past year to further develop its compliance program. It recently hired a chief ethics and compliance officer, a member of the executive leadership team reporting directly to the CEO, to lead the effort. To address increasingly strict regulations, Carnival has been improving the fuel efficiency of its ships and reducing emissions by optimizing itineraries, adding technology--such as Advanced Air Quality Systems--to ships to reduce sulfur emissions, building more fuel-efficient ships, and investing in ships that use lower-emission fuels (e.g., liquefied natural gas). Carnival's sizable cash flow base allows it to absorb these investments with limited impact to credit measures. Social and governance factors, particularly safety risks, affect our view of Carnival's credit quality. If left unmanaged, safety risks such as engine room fires and other fatal catastrophes onboard cruise ships--whether at Carnival or in the broader cruise industry--can lead to lower customer demand, declining net revenue yields, increased cash flow volatility, and consequently, weaker credit measures. In our view, the company's safety measures lessen (but do not eliminate) both the likelihood and severity of future events. Carnival undertook these risk-mitigation efforts following multiple ship fires and other accidents in 2012 and 2013. These efforts included improved measures to prevent fuel leaks and fires together with new detection and suppression systems, increased redundancies and emergency power in engine rooms, an enhanced simulation-based safety-training center, and a standardized bridge layout and bridge resource management procedures across the fleet. Carnival's three fleet-operations centers and technology investments provide enhanced communication and support for ships and an increased ability to monitor safety, security, and environmental performance. The company also employs a chief maritime officer, who is responsible for overseeing all of Carnival's health, environmental, safety, and security (HESS) and sustainability obligations. Carnival's boards have HESS committees comprising independent directors who monitor risks and associated mitigating actions and review HESS audits. The company also uses HESS performance as a modifier to adjust incentive compensation. We believe these changes increase accountability and align incentives in a manner that better allows Carnival to manage these risks, and they support our satisfactory management and governance assessment. | Ariel Silverberg | |
| Cedar Fair L.P.(BB/Negative/--) | ||
| Cedar Fair is more exposed than the overall leisure sector if climate change results in prolonged extreme weather-related events. Because the parks are outdoors, regional operators face the ongoing challenges of rain and cold weather. In addition, the company has a compressed operating calendar, as parks generate most of their annual EBITDA during the second and third quarters, when schools are out of session. However, revenue generated in the seasonally strongest third quarter as a percentage of annual revenue has declined over time, and recent investments in theme park-related amenities, such as hotels and sports facilities, will continue to reduce its reliance on that period. The company generates about 50% of its annual revenue from two parks, Cedar Point and Knotts Berry Farms. | Daniel Giambrone | |
| Churchill Downs Inc.(BB/Stable/--) | ||
| Churchill Downs is more exposed to social risk factors than other leisure companies because Churchill Downs is a high-profile participant in the horse racing industry. The industry is facing an evolving landscape related to animal welfare and safety practices, as well as heightened media attention because of horse fatalities and injuries at tracks across the U.S. We believe these risks are heightened for Churchill Downs because of the high-profile nature of its iconic Kentucky Derby event, which we estimate represents 25%-30% of Churchill Downs' total EBITDA. We believe injuries or casualties during such a high-profile event could hurt the company's reputation. In response to continued social pressure and activism efforts by animal rights groups, Churchill Downs has implemented safety initiatives that focus on improving horse safety to reduce these reputational and operational risks. The initiatives include hiring an equine medical director to oversee equine safety and care at all its race tracks, building a quarantine facility and equine medical center at Churchill Downs Racetrack that can provide immediate onsite care in the event of an injury, adopting international standards for crop use, and advocating for changes to race-day medication practices. Additionally, Churchill Downs has joined with other thoroughbred racing organizations to create an industry safety coalition to improve industry safety and reduce racetrack fatalities. Environmental risks have less of an effect on Churchill Downs' credit quality, though extreme weather events can disrupt business in some of its regional casino markets. However, we believe the company has sufficient diversity and insurance coverage, so the impact of extreme weather events is typically modest and temporary. | Melissa Long | |
| Cirsa Enterprises S.L.U.(B/Stable/--) | ||
| Cirsa is exposed to social risks via tightening regulatory regimes in its operating countries. Although it is geographically more diverse than some of its European gaming peers, Cirsa is significantly exposed to Spain (45% of total EBITDA), Panama (20%), and Colombia (14%), as well as the potential regulatory and taxation changes in those countries. In fact, Cirsa's profitability was hurt in Italy, Mexico, and Peru due to recent gaming tax increases. Cirsa's ability to adapt to regulatory changes, comply with license terms, and proactively engage on responsible gambling will be critical for its long-term sustainability. | Natalia Arrizabalaga | |
| Codere S.A.(B-/Negative/--) | ||
| Codere's greatest risk exposure stems from social and governance factors. Over the last couple years, regulatory restrictions--specifically gaming tax increases in Italy, Mexico, and Argentina--have negatively affected Codere's profitability. Gaming license renewals are often subject to the authorities' will to deny, revoke, suspend, or refuse them; we consider the governments in some Latin American countries, such as Argentina, to be more unpredictable in this regard. Although we acknowledge Codere's geographical diversification, the company is still highly exposed to Mexico (36% of EBITDA), Argentina (27%), Spain (13%), and Italy (9%). Codere's ability to adapt to regulatory changes, comply with license terms, and proactively engage on responsible gambling will be critical for its long-term sustainability. In October 2019, Codere launched an investigation into its Latin American subsidiaries, where it had discovered accounting inconsistencies. These irregularities were identified by internal control procedures, and the company appointed an independent external adviser to undertake a forensic analysis. Although the company continues to enhance its internal control and increase automation of its systems to ensure that this remains an isolated event, we view Codere's governance risk as higher than its peers and assess management and governance as weak. | Natalia Arrizabalaga | |
| Crown Resorts Ltd.(BBB/Stable/A-2) | ||
| Crown's credit quality is more negatively influenced than global peers by social factors, given regulatory complications following Melco's recent minority-ownership interest. We consider the heightened scrutiny prompted both by Nine Entertainment Co.'s allegations, as well as disclosures made to New South Wales (NSW) Parliament. Melco requires regulatory approval from the three Australian states where Crown holds casino licenses in order for it to either increase its shareholding level or seek board representation or influence. The NSW Independent Liquor and Gaming Authority has begun an inquiry into the sale to Melco. We will monitor any implications that might have for VIP gaming volumes, Crown's ownership composition, or licensing requirements. In our view, a severe regulatory infraction could result in penalties, and ultimately, a review of Crown's license. We believe Crown has adopted a more conservative approach to the Chinese VIP market, including better marketing risk controls, following sharp declines in 2016 after China detained some employees. Crown's actions at that time allowed it to withstand earnings volatility and limit deterioration in credit measures. Chinese VIP revenue will remain an important part of Crown's long-term earnings mix, particularly for Crown Sydney, which faces regulatory constraints in the mass-market segment. | Joel Yap | |
| Downstream Development Authority(B/Negative/--) | ||
| DDA has more exposure to environmental risk factors than other leisure companies, given its reliance on a single asset in Oklahoma--an area prone to tornadoes--to meet debt-service needs. This exposes it to significant event risk and potential cash flow volatility, as extreme weather events can damage or destroy assets and weaken regional economic conditions. Regional casinos, such as DDA's Downstream Casino Resort, rely heavily on the economic health of customers in nearby areas to support visitation and gaming spend, and the impact of natural disasters on these customers can lead to reduced visitation and spending. For instance, in May 2011, a catastrophic EF5 tornado struck Joplin, Mo., one of Downstream's key markets. In the eight days immediately following the tornado, total coin-in at the property fell 18%. Although depressed visitation and spending may be temporary and losses may be partially offset by property and business interruption insurance proceeds, the recovery time and collection of insurance proceeds vary. Furthermore, the proceeds may not be enough to fully recoup lost cash flow. | Brian Chung | |
| Enterprise Development Authority(B-/Positive/--) | ||
| EDA is more exposed to environmental risks than other leisure peers because it operates a single casino asset in Yuba County, Calif., an area highly vulnerable to natural hazards and extreme weather events such as wildfires. These types of events can dampen visitation (and thus, revenue), lead to property closures, and damage or even destroy assets. Regional casinos, such as EDA's Hard Rock Hotel and Casino Sacramento at Fire Mountain rely heavily on the economic health of customers in nearby areas, which drives visitation and gaming spend. Natural disasters can weaken regional economies and hurt discretionary spending in the area. Although depressed visitation and spending may be temporary and losses may be partially offset by property and business interruption insurance proceeds, the recovery time and collection of insurance proceeds vary. Furthermore, the proceeds may not be enough to fully cover lost cash flow. | Ariel Silverberg | |
| Gamenet Group S.p.A.(B+/Watch Neg/--) | ||
| Social risks are significant for gaming companies, including Gamenet. Public and regulator concerns include money laundering, gambling addiction, harm to underage players, and displays of antisocial behavior around gambling halls. Countries have enacted laws to counter these factors, often significantly hindering gaming companies and their financial performances. An example of such regulation that affects Gamenet is the Italian government's decision to reduce the number of amusement with prizes (AWP) machines by 35% and impose limitations affecting distance between shops, distance from specific areas including schools, and operating hours. The government also banned the advertising of gaming and betting through media channels (including sponsorships) in 2018. So far, Gamenet has had a strict and conservative approach to the compliance of regulatory laws. We believe its ability to continue to do so and to engage on responsible gambling will be critical for its long-term sustainability. | Marion Casassus | |
| Gamesys Group PLC (formerly JPJ Group PLC)(B+/Stable/--) | ||
| Of the leisure operators, we consider Gamesys Group PLC to be more exposed to social risk because of inherent exposure to issues such as gambling addiction and money laundering. In our opinion, online gaming regulation has been slower to catch up with the rate of market expansion and technological development. Within the U.K., where Gamesys generates about 65% of its revenues, there are concerns that the industry hasn't done enough to regulate itself (e.g., the November 2019 interim report by a group of members from the previous parliament). Therefore, there is a potential for additional regulatory oversight to address the concerns of the underlying social risk. Additionally, Gamesys generates about 22% of its revenues from unregulated markets, exposing itself to further regulatory scrutiny. | Jebby Jacob | |
| Genting Berhad(BBB+/Stable/--) | ||
| For Genting and its peers in the gaming industry, governance and social considerations are more relevant than environmental factors. Genting operates in Malaysia and Singapore, which strictly regulate the number of casino licenses and perform regular compliance audits aimed to curb any antisocial behavior in the community. We believe various government measures, including gaming tax increases and regular license renewals, directly affect Genting's financial performance. In our view, the Malaysian government's 2019 increase in the gaming tax rate up to 35% from 25% and the casino license fee increase to MYR150 million from MYR120 million will hurt profitability. In April 2019, Singapore increased gaming taxes up to a rate of 22% under a new tiered tax structure as part of extending the licenses until 2030. These taxes, which take effect February 2022, are much higher than the current 5% and 15% rates on VIP and mass gaming revenue, respectively. We believe the company's margins will dip once these regulations take effect. Malaysia and Singapore have varying limitations on gambling by locals to reduce social risks. Singapore requires local gamblers to pay entrance fees, and religious norms prohibit gambling for a large population in Malaysia. Environmental risks, mainly related to project delays, factor into our credit analysis but do not materially affect Genting's credit profile. | Harshada Patwardhan | |
| GVC Holdings PLC(BB/Positive/--) | ||
| Social risks are significant for gaming companies, including GVC. Public and regulator concerns include money laundering, gambling addiction, harm to underage players, and display of antisocial behavior around the gambling halls. Consequently, various countries have enacted laws, often significantly affecting gaming companies and their financial performances. An example is the U.K. government's decision to reduce the maximum stakes on fixed-odds betting terminals (FOBT) to £2 from £100 as of April 1, 2019. Based on GVC's expectations, this regulatory change will likely reduce the company's EBITDA by about £137 million in 2019. Our management and governance assessment on the company is fair, reflecting the management team's good track record in integrating transformational acquisitions while maintaining its strategic focus to improve geographic and product diversification. However, the assessment also considers the £5.9 million fine paid to the U.K. Gaming Commission concerning historical compliance failures that took place within the Ladbrokes Coral business prior to GVC acquiring it. While the size of this fine is not material given GVC's scale, further regulatory failings could represent a risk. | Jebby Jacob | |
| Harley-Davidson Inc.(BBB+/Negative/A-2) | ||
| Harley-Davidson is modestly exposed to environmental risk factors, particularly from the regulation of greenhouse gas emissions. The company's motorcycles use internal combustion engines, which are subject to federal and state regulation. During periods of change in regulatory requirements, Harley typically incurs product manufacturing cost increases because of a higher cost of compliance. The company has also been subject to regulatory fines and absorbed the costs of environmental clean-up actions, and it probably will do so again. However, increased regulatory and environmental clean-up costs have not recently resulted in a significant impairment to cash flow--nor are they expected to. We believe Harley's recent plan to accelerate a number of strategic operating initiatives is mostly an attempt to combat anticipated revenue headwinds over the next few years. But we also believe the company's plan to accelerate a line of electric vehicles is partially because of increasing public attention to climate change and a concerted effort to expand demand by appealing to customers who value more environmentally friendly vehicles. During the next few years, electronic vehicle development and manufacturing will require significant investment and the dedication of the company's dealership network. The benefits from this initiative might not materially increase demand for another few years, and it will likely add risks in the near term. | Jing Li | |
| Hasbro Inc.(BBB-/Stable/A-3) | ||
| As is typical among toy manufacturers, Hasbro faces the perpetual risk of negative product safety events that could harm consumers and damage a core brand. The risk of brand damage and the associated impact on sales is elevated in the toy industry, given most sales happen in a short timeframe leading up to the holiday season. We believe the company has successful quality control programs at its manufacturing and assembly operations that are comparable with those of peers, and it has been a while since the company experienced a significant recall. However, Hasbro has periodically experienced expensive product recalls that temporarily impair margin. In addition, the company is exposed to, and has periodically incurred, regulatory fines and the costs of environmental clean-up actions at its manufacturing operations. However, increased regulatory and environmental clean-up costs have not recently resulted in a significant impairment to cash flow--nor are they expected to. Hasbro outsources much of its manufacturing to third parties, and the company is exposed to product safety and environmental risks that are typical in manufacturing, unless quality control programs are robust enough to mitigate the risk. | Daniel Giambrone | |
| Hilton Worldwide Holdings Inc.(BB+/Stable/--) | ||
| Hilton's highest social risk exposure relates to terror attacks, geopolitical unrest, and health scares that have a temporary but significant negative impact on travel demand and financial performance. However, nearly all of the company's cash flow comes from franchise and management fees from its globally diversified rooms base, which frequently mitigates regional events because travel demand tends to shift to alternative markets and eventually recover once fears subside. Events that could affect ratings are those similar in scope and longevity to the aftermaths of the Sept. 11, 2001, terror attacks and periodic flu pandemic scares over the past two decades, particularly if they occur with an otherwise weak economy. Data privacy is another risk factor. Over the past several years, database breaches at multiple hotel companies exposed hotel guests' sensitive personal, travel, and payment data. While hotel companies typically invest substantial amounts of money toward detection and prevention, we have limited visibility into how cyberrisks will evolve. The most significant long-term cyberrisk is a material breach that establishes a pattern or shakes guests' confidence in the security of their personal information, thus hurting Hilton's reputation. | Jing Li | |
| Hornblower HoldCo LLC(B/Stable/--) | ||
| As a cruise and ferry operator, Hornblower is more exposed to environmental risks than other leisure companies because of its heavy use of fuel--which creates greenhouse gas emissions--and the potential environmental damage that could result from a ship accident. Hornblower has been addressing its fuel usage by converting existing engines to more efficient engines and investing in research and development to convert its vessels to all-electric propulsion systems and hybrid systems. The effective management of safety risks is also a key factor that affects our analysis of cruise operators, including Hornblower, because accidents and other ship incidents can lead to lower customer demand and reputational damage. This can lead to significant cash flow volatility and weaker cash flow measures, particularly given Hornblower's smaller cash flow base (relative to its peers in the leisure space and larger, more diversified cruise operators) and some cash flow concentration in its individual concession contracts. While we factor these risks into our analysis of Hornblower's credit quality, they have not yet led to any rating actions. | Ariel Silverberg | |
| Hurtigruten Group AS(B-/Stable/--) | ||
| The global cruise industry presents exposure to environmental risks, as its activity generates greenhouse gas emissions and other polluting residues. Ocean operators also tend to use higher-polluting vessels, which are generally powered by bunker fuel engines. The long life of their vessels tends to result in older and less energy-efficient fleets than their river-based counterparts. We view Hurtigruten's exposure to environmental, social, and governance risks to be in line with the broader global cruise industry. The group's efforts to convert some of its vessels into cleaner hybrid and liquefied natural gas-fueled engines partially offset the higher environmental impact from its older vessels. Hurtigruten is exposed to material weather-related risks, and its expedition cruises operate in high-risk areas such as the Arctic Ocean and Antarctica. Its coastal cruises benefit from higher stability and visibility of earnings due to long-term agreements with the Norwegian government. We consider the group's small fleet, as well as its geographic and brand concentration as key factors of its ESG-related risk exposure. Operating incidents, such as the ones U.S.-based Viking Cruises experienced in 2019, could lead to brand degradation over time and could place further pressure on future earnings. Other safety and weather-related risks affecting the group's new vessels could have a significant impact on Hurtigruten's earnings and cash flow generation, and they could result in sustained high levels of leverage. | Alex Roig | |
| InterContinental Hotels Group PLC(BBB/Stable/--) | ||
| We believe the hotel sector's highest ESG risk exposure is related to terror attacks, geopolitical unrest, and health scares that have a significant negative impact on travel demand and financial performance temporarily. However, nearly all of IHG's cash flow is from franchise and management fees generated from its globally diversified rooms base, which frequently mitigates regional events because travel demand tends to shift to alternative markets and eventually recover once fears subside. Multiple hotel data breaches over the past decade have mostly targeted consumer payment information, but occasionally even more sensitive identity data like national ID and passport information. While we believe hotel companies typically invest substantial amounts of money toward detection and prevention, we have limited visibility into how cyber risks will evolve. The most significant long-term cyber risk is a material breach that establishes a pattern or shakes guests' confidence in the security of their personal information, thus hurting IHG's reputation. | Hina Shoeb | |
| International Park Holdings B.V.(B-/Stable/--) | ||
| IPH (PortAventura) is highly vulnerable to seasonality and weather-related risks compared with other companies in the leisure industry. Because its parks are outdoors, it faces the ongoing challenges of rain and cold weather. In addition, its business is highly seasonal, as parks generate about 65% of EBITDA during the summer months, when schools are out of session. PortAventura is a destination resort that comprises several parks and adjacent hotels. We view the integrated resort as akin to a single-asset business and believe its exposure to environmental risk is higher than more diversified theme park operators, given its reliance on a single asset for cash flow generation. For instance, the company's performance was affected by unusual bad weather in May and June 2018. That being said, we acknowledge its favorable geographical location in terms of a normalized favorable climate, and we see it as less susceptible to weather-related risks than other rated regional theme park operators because visits to destination theme parks usually require planning and advance ticket purchase. In addition, we note the company's effort to develop off-season passes and extend the operating calendar to mitigate seasonality. We also acknowledge its initiative to define a corporate responsibility strategy. In 2019, 100% of the electricity PortAventura consumed came from renewable energy sources without carbon dioxide emissions. In 2020, it will install a photovolcanic plant that will supply one-third of the resort's energy. PortAventura's operations as a single-asset destination remain highly exposed to safety issues, which may negatively influence brand or social perceptions. | Marion Casassus | |
| Las Vegas Sands Corp.(BBB-/Stable/--) | ||
| LVS is a highly regulated gaming operator, so social and governance risks can be significant. Compliance with gaming and other regulations and the company's ongoing ability to meet regulators' suitability requirements are critical to its ability to operate in its key markets. LVS could incur fines or license revocation if it does not comply with required regulations. In 2016 and 2017, it settled SEC and Department of Justice investigations related to compliance with the Foreign Corrupt Practices Act. The penalties were modest and did not impair credit measures. Furthermore, we believe LVS's compliance procedures have strengthened since the incidents. Increased regulations to address social risks can also periodically introduce cash flow volatility. For example, the Chinese government's crackdown on perceived corruption and increased scrutiny on the movement of money into and out of Macau contributed to a nearly 36% decline in LVS's Macau EBITDA from 2014-2016. Smoking bans, such as the one enacted in Macau, can also negatively affect cash flow. Environmental risks are less impactful to credit quality, though extreme weather events can disrupt business. We believe LVS has sufficient insurance coverage and financial flexibility to weather those events. | Melissa Long | |
| Lindblad Expeditions Holdings Inc.(BB-/Stable/--) | ||
| Expedition cruise operator Lindblad is more exposed to environmental risk factors than other leisure companies because of its significant fuel usage (resulting greenhouse gas emissions), which also exposes the company to regulatory risks as various regulatory agencies and governments impose more stringent environmental regulations. Additionally, ship accidents, if they occur, can cause potential environmental damage and impair the company's ability to operate, especially in higher-risk areas such as Antarctica and the Galapagos Islands. Social and governance factors, particularly safety risks, also affect our analysis of Lindblad's credit quality. If ineffectively managed, safety risks such as engine room fires and other fatal catastrophes on ships, whether within the company or in the broader cruise industry, can result in lower customer demand and declining net revenue yields. This can lead to significant cash flow volatility and weaker credit measures, particularly given Lindblad's relatively small fleet size, small cash flow base, and its single-brand concentration. | Brian Chung | |
| Marriott International Inc.(BBB/Stable/A-2) | ||
| Marriott's highest social risk exposure relates to terror attacks, geopolitical unrest, and health scares that temporarily but significantly affect travel demand and financial performance. However, nearly all of Marriott's cash flow is from franchise and management fees generated from its globally diversified rooms base, which frequently mitigates regional events because travel demand tends to shift to alternative markets and eventually recover once fears subside. Events that could affect ratings are those similar in scope and longevity to the aftermaths of Sept. 11, 2001, and periodic flu pandemic scares over the past two decades, particularly if they occur with an otherwise weak economy. Data privacy is another risk factor. In 2018, a breach of the Starwood system's reservation database exposed guests' sensitive personal, travel, and payment data. We believe Marriott's strong management and governance mitigates the breach risk by helping guests monitor their information, phasing out Starwood, and accelerating security enhancements. In addition, the company has strong financial flexibility to accommodate any potential litigation and penalties. However, the most significant long-term risk is a material breach that establishes a pattern, which could hurt Marriott's reputation. | Emile Courtney | |
| Mattel Inc.(BB-/Negative/--) | ||
| Like most toy manufacturers, Mattel faces a perpetual risk of negative product safety events that could harm consumers and damage a core brand. Recently, Mattel recalled and discontinued its Fisher-Price Rock 'n Play Sleeper after reports of infant deaths. We believe the company took these actions to demonstrate to consumers that product safety is a priority and to avoid any long-term damage to the Fisher-Price brand. The risk of brand damage and the associated impact to sales is elevated in the toy industry, given most sales happen in a short timeframe leading up to the holiday season. We believe this risk might be even higher for Mattel, given some revenue concentration among the company's five core brands: Barbie, Hot Wheels, American Girl, Fisher-Price, and Thomas & Friends. While we believe it has successful quality control programs at its manufacturing and assembly operations that are comparable with those of peers, Mattel has experienced expensive product recalls that temporarily impair margin. In addition, it is exposed to the risk of regulatory fines and the costs of environmental clean-up actions at its manufacturing operations. However, regulatory and environmental clean-up costs have not recently resulted in a significant impairment to cash flow--nor are they expected to. If Mattel outsources more of its manufacturing to third parties over the next several years, it might encounter elevated product safety and environmental risks that are typical during major operating transitions, unless quality control programs are robust enough to mitigate the incremental risk. | Daniel Giambrone | |
| Melco Resorts (Macau) Ltd.(BB/Watch Neg/--) | ||
| Melco and sister company Studio City (both subsidiaries of Melco Resorts & Entertainment) are highly regulated as gaming operators, and appropriate governance plays a key role in regulators licensing decisions. The company's Macau gaming license expires in June 2022. Its adherence to regulations, especially having appropriate procedures to prevent money laundering, could affect its ability to renew or obtain a new gaming license. If Melco failed to renew or obtain a new gaming license or the government imposed materially onerous conditions, the company's competitive position and credit measures could deteriorate. Increased regulations to address social risks can introduce volatility in gaming revenue and profitability. For example, concerns about proliferation of gaming, rapid gross gaming revenue growth, and perceived corruption led the Chinese central government to impose visa restrictions, increase scrutiny on the movement of money into and out of Macau, and increase enforcement of marketing restrictions. These regulatory changes contributed to a 34% decline in Macau GGR in 2015. Smoking bans such as the one enacted in Macau can also hurt revenue. The Macau ban resulted in additional capital spending to create designated smoking lounges. The government's commitment to diversify revenue could also lead to higher capital spending to develop nongaming amenities. Melco and Studio City both face modest environmental risks, primarily related to extreme weather, which can temporarily disrupt operations and delay construction projects. | Sophie Lin | |
| MGM Resorts International(BB-/Stable/--) | ||
| MGM is a highly regulated gaming operator for whom social and governance risks can be significant. Compliance with gaming regulations and the company's ongoing ability to meet regulators' suitability requirements are critical to MGM's ability to operate in its key markets. The company could incur fines or license revocation if it does not meet licensing requirements. However, MGM has not faced fines or license revocations so far that have materially hurt its competitive position or credit measures. Increased regulations to address social risks can also periodically introduce cash flow volatility. For example, the Chinese government's crackdown on corruption and increased scrutiny on the movement of money into and out of Macau contributed to a nearly 37% decline in MGM Macau's EBITDA in 2015. Smoking bans, such as the one enacted in Macau, can negatively affect cash flow and drive additional capital spending. As a resort operator, MGM is also exposed to perceived safety risks following an event such as the 2017 mass shooting in Las Vegas. These types of events can lead to volatility in cash flow and credit measures, from reduced travel demand, as well as litigation and potential monetary judgments. However, as long as events are isolated, cash flow declines are usually temporary and eventually recover once fears subside, as MGM's did in 2019. Comparatively, litigation outcomes often take a longer time to materialize. Environmental risks have less of an effect on credit quality, though extreme weather events can disrupt business in Macau or other regional markets. However, MGM has sufficient diversity and insurance coverage, so the impact of extreme weather events is typically modest and temporary. | Melissa Long | |
| NCL Corp. Ltd.(BB+/Stable/--) | ||
| The cruise industry, including NCL, is more exposed to environmental risks than the broader leisure industry because of ship emissions from the industry's heavy use of fuel, increasing environmental regulations, and potential environmental damage that could result from a ship accident. To reduce emissions and address increasingly strict regulations, NCL has been improving the fuel efficiency of its ships and reducing its fuel consumption by optimizing itineraries and speed and adding new technology. As of 2020, about two-thirds of NCL's capacity is equipped with exhaust gas cleaning systems, which reduce the amount of sulfur oxide and particulate matter emitted from the ship by cleaning emissions before they are released. NCL has also made investments in cold-ironing, which allows ships to access onshore electrical power sources, and about 35% of NCL's fleet is equipped with this technology. NCL has typically managed these investments without a material impact to credit measures, given its good cash flow base in an otherwise benign economic environment. Social and governance factors, particularly safety risks, also affect our analysis of NCL's credit quality. If ineffectively managed, safety risks such as engine room fires and other fatal catastrophes on cruise ships, whether within the company or in the broader cruise industry, can lead to lower customer demand, declining net revenue yields, increased cash flow volatility, and consequently, weaker credit measures. To address onboard fire risks, NCL has equipped its ships with fire suppression technology, as well as fire prevention technology for higher-risk areas such as engine rooms. We believe cybersecurity and data privacy risks are increasing for cruise operators, given their access to sensitive personal customer information and increasing use of digital solutions, which could include measures such as facial recognition to board ships. However, to date, NCL has not reported any material incidents, and we believe it allocates sufficient resources to managing information technology in order to mitigate these risks. | Brian Chung | |
| Odyssey Europe Holdco S.à r.l(B/Stable/--) | ||
| Odyssey is exposed to social risks related to tighter regulatory regimes in the Baltic region, Italy, Slovakia, and Malta. In our view, the company's geographical diversification is good compared to European peers with single-country exposure. The Baltic region's regulatory environment has historically been more favorable and stable than what exists in other European countries. However, in 2018 and 2019, gaming tax increases in Latvia and Italy hurt Odyssey's profitability. Meanwhile, the Riga City Council introduced a law to ban gambling venues in the city's historical center, excluding four- and five-star hotels. Given Odyssey's relatively small size, we believe it is more vulnerable to these challenges. Its ability to adapt to regulatory changes, comply with license terms, and proactively engage on responsible gambling will be critical for its long-term sustainability. | Natalia Arrizabalaga | |
| OPAP S.A.(BB-/Negative/--) | ||
| OPAP's single-country exposure to Greece makes it more vulnerable to changes than its more diversified peers. Greece, specifically, is currently one of the most taxed gaming regimes in Europe. However, given the €300 million gross gaming revenue (GGR) tax prepayment signed by OPAP in 2011 concerning second-quarter 2020 through fourth-quarter 2030, the government may actually decrease the GGR tax during 2020. Moreover, 50% of OPAP's revenue comes from lotteries, and we view social risks for lotteries as potentially less exposed to adverse regulatory changes than other gaming products. In line with our view of other gaming companies, OPAP's ability to adapt to regulatory changes, comply with license terms, and proactively engage on responsible gambling will be critical for its long-term sustainability. | Natalia Arrizabalaga | |
| Playa Hotels & Resorts N.V.(B/Stable/--) | ||
| Playa is more exposed to environmental and social risks than other leisure operators because of its limited geographic diversity and concentration in the Caribbean. Playa is exposed to the possibility of severe hurricanes that can impair operations at its Caribbean beachfront resorts. Storms can cause significant property damage, which occurred when hurricane Odile hit Playa's Hyatt Ziva Los Cabos property in 2014. Somewhat mitigating this risk is our assumption that Playa has sufficient insurance to cover reconstruction costs and business disruption. However, highly destructive storms can diminish traveler demand and cripple local infrastructure, potentially impairing Playa's resorts beyond the repairable property damage. We believe Playa's social risk exposure relates to terror attacks, geopolitical unrest, health scares, and other events that can temporarily have significant negative impacts on travel demand and financial performance. The company's limited geographic diversity makes it vulnerable to idiosyncratic regional events in the areas where it operates, which have included health scares and crime concerns in recent years. Furthermore, a global event similar in scope and longevity to the aftermaths of Sept. 11, 2001, would likely place downward pressure on the rating, particularly if it occurred in conjunction with an otherwise weak economy. | Daniel Giambrone | |
| Royal Caribbean Cruises Ltd. (including Silversea Cruise Holding Ltd.)(BBB-/Stable/A-3) | ||
| The cruise industry, including Royal, is more exposed to environmental risks than the broader leisure industry because of ship emissions from the industry's heavy use of fuel, increasing environmental regulations, and potential environmental damage that could result from a ship accident. Royal has been addressing increasingly strict regulations by building more fuel-efficient ships, investing in ships that use lower-emission fuels (e.g., liquefied natural gas), and adding technology to reduce the sulfur content of emissions. Royal has typically managed these investments without a material impact to credit measures, given its sizable cash flow base in an otherwise benign economic environment. Social and governance factors, particularly safety risks, also affect our analysis of Royal's credit quality. If ineffectively managed, safety risks such as engine room fires and other fatal catastrophes on cruise ships, whether within the company or in the broader cruise industry, can lead to lower customer demand, declining net revenue yields, increased cash flow volatility, and consequently, weaker credit measures. We believe cybersecurity and data privacy risks are increasing for Royal and other cruise operators, given their access to sensitive personal customer information and increasing use of digital solutions, which could include measures such as facial recognition to board ships. However, Royal has not reported any material incidents, and we believe it allocates sufficient resources to managing information technology in order to mitigate these risks. | Ariel Silverberg | |
| Safari Beteiligungs Gmbh(CCC/Negative/--) | ||
| We view Safari as nearly having single-country exposure, and thus it is highly exposed to specific regulatory risks due to the social exposure of the overall gaming industry in Germany, making it more vulnerable to changes than its more diversified peers. Germany has one of the strictest gaming regulatory frameworks, and we expect further restrictions to come in 2021. In November 2018, due to the provisions of the changed gaming ordinance, Safari had to implement a new generation of AWP machines, which led to a significant decrease of its revenues and profitability. Furthermore, Safari is particularly exposed to continued uncertainty around how the restrictions will be implemented after the German Interstate Treaty on Gambling expires in June 2021. On the other hand, a new interstate treaty may open up the German online-markets, providing growth opportunities to Safari. Safari's ability to adapt to regulatory changes and proactively engage on responsible gambling will be decisive for its long-term sustainability. | Natalia Arrizabalaga | |
| SeaWorld Parks & Entertainment Inc.(B+/Stable/--) | ||
| We view SeaWorld as more exposed to social risks than other leisure companies because of the possibility that unfavorable publicity related to its use of orcas and other marine animals could drive a renewal of reputational weakness in the event of an unexpected and inadvertent operating misstep. Partly as a result of past reputational weakness, SeaWorld experienced higher volatility in S&P Global Ratings' measure of EBITDA than many other leisure companies over the past several years. However, attendance rates at SeaWorld's parks are currently recovering. SeaWorld stopped breeding its orcas in captivity, announced partnerships with the Humane Society of the United States and a number of conservation organizations, and phased out theatrical orca shows at all of its SeaWorld-branded parks in 2019.In addition, the company has begun publicizing its long-standing program of rescuing marine life. While we believe these actions could bolster SeaWorld's reputation and reduce regulatory and operational risk over the long term, this depends partly on its ability to effectively market them. SeaWorld is less susceptible to weather-related risks than the other rated regional theme park operators because it operates in regions where it can remain open year-round. | Daniel Giambrone | |
| Sisal Group S.p.A(B+/Negative/--) | ||
| Social risks are significant for gaming companies, including Sisal. Public and regulatory concerns include money laundering, gambling addiction, harm to underage players, and displays of antisocial behavior around gambling halls. Countries have enacted laws to counter these factors, often significantly hindering gaming companies and their financial performances. One example is the Italian government's decision to reduce the number of AWP machines by 35% and impose limitations affecting distance between shops, distance from specific areas including schools, and operating hours. The government also imposed a ban on the advertising of gaming and betting through media channels (including sponsorships) in 2018. However, we note Sisal's diversified business model, with its exposure to payment services activity that is not affected by these social risks and contributes about 25% of the group's EBITDA. So far, Sisal has had a strict and conservative approach to the compliance of regulatory laws. Its ability to continue to do so and to engage on responsible gambling will be critical for its long-term sustainability. | Marion Casassus | |
| Six Flags Entertainment Corp.(BB/Negative/--) | ||
| Six Flags is more exposed than the overall leisure sector if climate change results in prolonged extreme weather-related events. Because the parks are outdoors, regional operators face the ongoing challenge of rain and cold weather. In addition, the company has a compressed operating calendar, as parks generate the vast majority of annual EBITDA during the second and third quarters, when schools are out of session. However, revenue generated in the seasonally strongest third quarter as a percentage of annual revenue has declined over time. The introduction of the company's multitiered membership program in 2018 caused a shift in Six Flags' customer base, as some people are opting for membership rather than season passes. We expect membership to continue to rise and for churn to be relatively low because unlike season passes, Six Flags does not need to resell the membership to customers after the initial year ends. Six Flags also recognizes membership revenue monthly (beginning in the second year of a customer's membership). The program will likely modestly smooth cash flow during the seasonally weak quarters. | Daniel Giambrone | |
| Studio City Co. Ltd.(BB-/Watch Neg/--) | ||
| See comment above on Melco Resorts (Macau) Ltd. | Sophie Lin | |
| Tabcorp Holdings Ltd.(BBB-/Stable/--) | ||
| As a highly regulated gambling company, Tabcorp's greatest risk exposure stems from social and governance factors. Regulatory and licensing compliance continue to be key governance factors for Tabcorp. Aside from moderate 2017 regulatory infraction penalties of A$45 million involving breaches of anti-money laundering laws during 2010 and 2014, Tabcorp has generally displayed strong engagement with regulators and operated within its regulatory constraints. It continues to enhance its corporate responsibility through its robust approach to its decisions and activities and the influence they have on societal and governance factors. This enables Tabcorp to adapt to future regulatory changes. These factors, along with its long track record of operating in heavily regulated environments, support our satisfactory management and governance assessment. From a social perspective, we believe wagering--and to a lesser extent, lotteries--can have lasting and negative effects on the end consumer. The increased use of digital platforms has also raised the importance of customer privacy and data security. In our view, Tabcorp allocates significant resources to managing IT in order to mitigate any risk of a future digital breach that could affect Tabcorp's reputation or customers' confidence in the security of their personal information. | Sam Playfair | |
| Tackle S.à r.l (Tipico)(B/Stable/--) | ||
| Tipico's geographical concentration in Germany and its narrow product offering (85% of revenues come from sports betting) highly expose it to social risks that result from regulatory changes within Germany. Compared to other peers, which operate in different jurisdictions and have a wider product offering, Tipico would be less able to absorb further regulatory or taxation changes. Tipico has demonstrated a higher tolerance for regulatory uncertainties than some of its peers. Even though Germany banned online casinos, Tipico continues to provide an online casino based on the interpretation that such gaming is allowed under European Union law. However, Novomatic AG, another operator in Germany, terminated its business-to-business contract with its customers to provide online casino content, which reduced reported EBITDA of its overall online segment by €75 million in 2018. A new interstate treaty may open up the German online-markets starting in July 2021, which would reduce regulatory uncertainty regarding Tipico's casino product. In line with our view of other gaming companies, we believe that Tipico's ability to adapt to regulatory changes, comply with license terms, and proactively engage on responsible gambling will be critical for its long-term sustainability. | Patrick Janssen | |
| TUI AG(BB/Negative/--) | ||
| As an integrated tourism group, TUI is exposed to ESG-related risks stemming from hotels, tour, cruise, and airline operations. Due to its significant airline and cruise operations, we view the group as more exposed to social- and environmental-related risks compared to the overall leisure sector. This stems from TUI's substantial fuel consumption and related emissions, as well as health and safety risks inherent in these businesses. Safety incidents on planes and cruise ships--whether within the company or within the wider industry--can cause lower customer demand. However, to date, TUI has not experienced any material incidents (e.g., cruise ship engine fires or air accidents). We believe sufficient resources are available to keep fleets up-to-date and that the company has processes to adequately monitor and manage safety risks. As part of TUI's general aircraft fleet renewal program, the newly commissioned and more fuel-efficient 737-8 Max aircrafts are globally grounded for safety reasons, affecting the company's financial performance materially in fiscal years 2019 and 2020. In addition, flight and holiday cancellations due to labor strikes can also trigger costly reimbursements for airline operators. We see TUI's diversified portfolio of leisure hotels and holiday destinations in the Mediterranean mainly as an adequate mitigant for social risks there. These risks primarily relate to terror attacks, geopolitical unrest, and health scares. For instance, during the Arab spring revolutions when there was high social unrest, strong holiday bookings at Spanish and Greek destinations balanced weaker bookings at destinations in Egypt and Tunisia. | Patrick Janssen | |
| UFC Holdings LLC(B/Stable/--) | ||
| UFC is more exposed to social risks than other leisure companies because of the ongoing risk that it could lose regulatory approval and social acceptance for the mixed martial arts sport. The company needs to advocate for and preserve regulatory acceptance in current jurisdictions to maintain its business model, as well as to expand acceptance in new jurisdictions domestically and internationally to grow its events footprint. Changes to the rules and regulations governing the sport and its legal status could significantly affect UFC's financial performance. Given participants' susceptibility to a low-probability but potentially fatal injury, UFC's access to the lucrative live events markets could be at risk, and any related unfavorable response by the media could reduce the company's sponsorship and commercial opportunities. We believe the company has implemented effective safety measures and strategies. These include marketing multiple fights at events and planning back-up matches, which mitigate the financial and audience impact of a fight cancellation in the event of a pre-fight injury. UFC has also constructed performance facilities to provide athletes with greater access to safer training and testing. We believe the recent sanctioning of mixed martial arts as a sport in specific jurisdictions, including New York in 2016, Western Australia in 2017, and France in 2020, demonstrates growing acceptance of the sport. ESPN's decision to distribute UFC content also demonstrates growing acceptance. | Jing Li | |
| Universal Entertainment Corp.(BB-/Negative/--) | ||
| We consider UE to be more exposed to governance risks than peers, and we assess management and governance as fair. In June 2017, the company removed then-chairman and founder Kazuo Okada from its board of directors, accusing him of misappropriating funds totaling about ¥2 billion. UE is making steady progress toward bolstering its management and governance. However, depending on the outcome of the ongoing litigations, there may be unpredictable negative effects on the company's management policy and business strategy. In our view, UE has conducted stable business operations in the domestic gaming machine business over a long period of time by constantly developing products that appeal to players and comply with strict regulations. We believe UE remains able to manage social risks that are specific to the gaming machine business and reduce their impact on earnings. On the other hand, the casino resort business is likely to remain susceptible to changes in regulations in countries such as the Philippines--home of the Okada Manila complex--and China, the origin of a large section of the resort's clientele. Environmental factors have a smaller impact on the rating on UE. Nevertheless, with almost all operating assets of its casino resort business in the Manila metropolitan area, UE faces asset concentration risk in the case of natural disasters. | Ryohei Yoshida | |
| Viking Cruises Ltd.(B+/Stable/--) | ||
| Cruise operator Viking is more exposed to environmental risks than other leisure companies because of its heavy use of fuels (which creates greenhouse gas emissions), increasing environmental regulations, and potential environmental damage that could result from a ship accident. Viking has been addressing its use of fuels and increasingly strict regulations by equipping its longships with hybrid diesel-electric engines, and all of its new ocean ships are equipped with exhaust cleaning systems. In our view, Viking is also more exposed to social risks, especially safety, compared to peers because of its relatively small fleet size and cash flow base, and because brand concentration can magnify the effects of ship accidents. Ship incidents, like the May 2019 one on the Viking Sigyn, which resulted in casualties and international headlines, and the March 2019 one on the Viking Sky, which also resulted in international headlines, could lead to brand degradation over time. This in turn could reduce customer demand and net revenue yields. Viking is more exposed to brand degradation because it relies on a single brand, which compares unfavorably to large cruise operators with multiple brands. Further, Viking's cash flow base is substantially smaller than that of the larger operators, and therefore, any ship incident that results in canceled or interrupted voyages, particularly on one of its ocean ships, can lead to a sharp decline in EBITDA and significant volatility in cash flow and credit measures. Although we believe the effective management of safety risks is heightened for Viking, we believe recent incidents do not reflect a systemic safety issue within Viking. | Brian Chung | |
| William Hill PLC(BB/Stable/--) | ||
| Social risks are significant for gaming companies, including William Hill. Public and regulator concerns include gambling addiction, money laundering, harm to underage players, and the display of antisocial behavior around the gambling halls. Consequently, various countries have enacted laws that have a significant impact on gaming companies and their financial performances. For example, in April 2019, the U.K. cut the maximum stakes on FOBT to £2 from £100. In November 2019, the U.K. All Party Parliamentary Group into Gaming Harm (APPG) released a report outlining recommendations that cover a broad spectrum of proposed regulatory changes to the U.K. gaming sector, including greater restrictions on the online gaming sector. While the APPG recommendations are not binding and did not involve the U.K. gaming regulator, they do shine a light on further potential regulation in the U.K. Gaming companies with material U.K. exposure, such as William Hill, remain exposed to further tightened regulations beyond current base-case expectations. These tightenings could occur sooner or have a greater financial impact than current market expectations. William Hill and other gaming operators are increasing self-regulation initiatives, which we view as a positive development in response to the heightened regulatory and social risks. It's also possible that the increasing regulation is creating a larger regulatory, compliance, and operational cost burden on the industry, thus increasing barriers to entry and entrenching existing market positions for incumbents. | Patrick Flynn | |
| Wynn Resorts Ltd.(BB/Watch Neg/--) | ||
| Wynn is more exposed to social and governance risks than its peers given recent regulatory investigations that resulted in fines and conditions on one of its gaming licenses that require an independent monitor to review and evaluate the company's adherence to policies. That said, Wynn maintained its gaming licenses in its two U.S. markets and the aggregate $55 million in regulatory fines was not large enough to materially raise our 2019 leverage measure. We do not expect conditions that Massachusetts imposed on Wynn's gaming license to materially affect Wynn's operating performance. We also believe the company has taken steps that have lessened its social and governance risks. Following allegations of sexual assault against its founder in January 2018, the company faced potentially severe reputational risks that could have impaired customer demand for its U.S.-based casino resorts and put its U.S. gaming licenses at risk. Wynn quickly distanced itself from its founder in the weeks following the allegations. The company executed a separation agreement (which paid no severance) and facilitated the sale of all of Steve Wynn's equity in the company. Over the past two years, the company also made substantial changes to its board, including adding four female directors, which increased female representation to about 40%. The median tenure of the board's eight independent directors is about 2.5 years, and most directors have served for fewer than four years. We believe regulators viewed these changes favorably, and that contributed to constructive resolutions. Regulators found evidence of problematic incidents in which senior executives who were aware of sexual assault allegations had not reported or investigated them in accordance with company policies. Most of those employees are no longer with the firm. | Melissa Long | |
| Ratings as of Feb. 11, 2020 | ||
This report does not constitute a rating action.
| Primary Credit Analysts: | Melissa A Long, New York (1) 212-438-3886; melissa.long@spglobal.com |
| Emile J Courtney, CFA, New York (1) 212-438-7824; emile.courtney@spglobal.com | |
| Patrick E Flynn, London + 44 20 7176 0053; patrick.flynn@spglobal.com | |
| Secondary Contacts: | Jing Li, New York + 1 (212) 438 1529; Jing.Li@spglobal.com |
| Hina Shoeb, London (44) 20-7176-3747; hina.shoeb@spglobal.com | |
| Ariel Silverberg, New York (1) 212-438-1807; ariel.silverberg@spglobal.com | |
| Graeme A Ferguson, Melbourne (61) 3-9631-2098; graeme.ferguson@spglobal.com | |
| Sophie Lin, Hong Kong (852) 2533-3544; sophie.lin@spglobal.com | |
| Harshada Patwardhan, Singapore + 65 6597 6152; harshada.patwardhan@spglobal.com | |
| Sam Playfair, Melbourne + 61 3 9631 2112; sam.playfair@spglobal.com | |
| Joel Yap, Melbourne (61) 3-9631-2196; joel.yap@spglobal.com |
No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.
Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.
To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw or suspend such acknowledgment at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.
S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process.
S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees.
Any Passwords/user IDs issued by S&P to users are single user-dedicated and may ONLY be used by the individual to whom they have been assigned. No sharing of passwords/user IDs and no simultaneous access via the same password/user ID is permitted. To reprint, translate, or use the data or information other than as provided herein, contact S&P Global Ratings, Client Services, 55 Water Street, New York, NY 10041; (1) 212-438-7280 or by e-mail to: research_request@spglobal.com.