‘Not fit for purpose’: The Star plans a $1.2b funding shake-up to tackle challenges ahead

The Star Entertainment Group (ASX: SGR) is banking on a $1.2 billion refinancing and recapitalisation package to provide the financial muscle the embattled casino operator needs to navigate a slew of operating and regulatory uncertainties ahead.

After declaring its existing funding arrangements are ‘no longer fit for purpose’, The Star overnight announced that it had secured $450 million in new debt facilities with Barclays Bank and Westpac Banking Corporation (ASX: WBC) while also announcing plans to tap existing shareholders on the shoulder to raise a further $750 million via an entitlement offer.

The combined $1.2 billion warchest will extinguish the company’s existing $688 million in drawn-down debt, while providing The Star with the flexibility it says is required to meet its medium-term commitments, which include more than $200 million in penalties to gaming regulators in NSW and Queensland.

The announcement, made to the ASX last night after the market closed, is the result of an extensive evaluation by The Star to secure an appropriate debt restructure in the wake of the company’s mounting debts largely stemming from separate investigations into the company’s suitability to hold a casino licence in NSW and Queensland.

It also follows an $800 million capital raise announced earlier this year after the company posted a $1.3 billion interim bottom-line loss.

The Star says the new debt facilities and capital restructure will provide the company with ‘increased financial flexibility to address known and expected liabilities over the medium term and help finance the ongoing needs of the business and expected joint-venture contributions’.

The Star’s CEO Robbie Cooke describes the announcement as ‘a key milestone in the renewal of The Star’.

“With an optimised capital structure, strengthened balance sheet and enhanced flexibility, we have a strong platform from which to deliver on our renewal program and strategic priorities,” Cooke says.

The Star says the capital restructure and refinancing package will meet the demands coming from various regulatory and legal matters, including the combined $200 million in fines issued by the NSW Independent Casino Commission and Queensland’s Office of Liquor and Gaming, as well as underpaid casino duty in NSW and the costs associated with the special manager appointed to oversee its casino operations.

The company is also bracing for any penalties that may arise from AUSTRAC’s civil proceedings, for which it has already made a $150 million provision in its books, as well as a shareholder class action that has yet to be decided.

The Star also has $159 million commitment in FY24 to its joint-venture projects in Queensland, namely the Queen’s Wharf development in Brisbane and the ongoing development program at The Star Gold Coast.

The refinancing plan has been accompanied by a trading update by The Star which reveals that operating conditions have stabilised as the company’s year-to-date revenue for FY24 is broadly consistent with the end of FY23.

However, with a number of uncertainties ahead from a trading perspective, including rising competition in the Sydney market from Crown Resorts’ Barangaroo casino and lower consumer discretionary spending, The Star is not providing FY24 earnings guidance.

The Star’s shares are likely to take a big hit on the ASX once trading resumes following a trading halt announced yesterday morning. The fall could reflect the pricing of the company’s capital raising which is pitched at 60c per share – a 20 per cent discount to its last traded price of 75c.

The Star’s $750 million equity raising comprises a $589 million one-for-1.65 pro-rata accelerated non-renounceable entitlement offer and a $161 million institutional placement.

Meanwhile, The Star has offered investors a warning ahead of its capital raise in a summary of risks that may impact the company. Among them is the in-principle agreement the company has reached with the NSW Government for concessions to a previously planned hike in casino tax, as well as The Star meeting its commitments to gaming regulators ahead of the final decisions on its casino licences in NSW and Queensland.

The company also notes the risk of proceedings brought against it by Multiplex in relation to a payment dispute involving the Queen’s Wharf development in Brisbane and the potential need to contribute further equity capital to its joint-venture projects in Queensland.

Increased industry competition and a challenging operating environment are also on the list, along with the potential impact of introduction of cashless and carded play, including mandatory pre-commitments.