Fitch Assigns Initial 'BB+' IDR to Las Vegas Sands; U.S. & Intl Credit Facils 'BBB-'; Outlook Stable
Fitch Ratings has assigned initial 'BB+' Issuer Default Ratings (IDRs) to the following issuers:
--Las Vegas Sands Corp. (LVS Corp; LVS when discussing consolidated entity),
--Las Vegas Sands LLC (LVS LLC),
--Sands China Ltd. (Sands China),
--VML U.S. Finance LLC (VML), and
--Marina Bay Sands Pte. Ltd (MBS).
Fitch has also assigned a 'BBB-' rating to the senior secured credit facilities at LVS LLC, VML and MBS. The Rating Outlook is Stable. A full of list of ratings is at the end of the release.
The 'BB+' IDR reflects LVS' strong financial profile supported by manageable debt levels, significant cash balances and a robust discretionary free cash flow (FCF) profile. LVS also maintains a strong business profile supported by high quality assets in attractive regulatory regimes, which provides the company with the best global market exposure profile in the industry.
The ratings also consider LVS' history of being an aggressive developer of large-scale gaming-centric integrated resorts, management's limited track record of adhering to stated financial policies, and recent corporate governance issues.
LVS' financial strength has improved significantly over the past several quarters, largely driven by the impressive ramp up of Marina Bay Sands in Singapore ($1.49 billion of EBITDA for the latest 12-month [LTM] period) and the winding down of LVS' considerable project pipeline. An upgrade of the IDR to investment grade would hinge on maintenance of its strong financial profile, management's capital allocation policies as it pursues development opportunities and returns cash to shareholders, and/or further clarity on its governance issues.
The 'BB+' IDR reflects the risk that the company could increase leverage in order to pursue multiple large-scale projects at once. LVS has historically been an aggressive developer and is actively seeking projects in several jurisdictions where certain regulatory changes are required to make large-scale casino resort developments feasible and more operator/developer friendly. The timing of such regulatory changes and subsequent licensing processes are hard to predict, therefore the capex spend on these developments could potentially be lumpy and pressure LVS' liquidity and credit metrics if multiple projects are taken on at once.
This concern is partially mitigated by LVS' attractive liquidity profile. As of Sept. 30, 2012, LVS had roughly $3.3 billion of available cash, $1.4 billion of revolver availability, and LTM discretionary FCF of $2.4 billion, which provides significant financial flexibility to invest in multiple projects, return cash to shareholders, and maintain modest leverage. LVS will use some of its cash and revolver availability to fund the $2.25 billion special dividend payable on Dec. 18.
As of Sept. 30, 2012, LVS had $9.5 billion of total debt consisting of $2.5 billion of debt related to U.S. and corporate operations, $3.2 billion of debt related to Macao operations, and $3.8 billion of debt related to Singapore operations.
U.S. Related Debt
In the U.S., debt consists mostly of $2.4 billion in term and delayed draw loans outstanding on its LVS LLC credit facility. The facility also includes a $500 million revolver, which was undrawn as of Sept. 30, 2012. LVS LLC is the borrower under the credit facility and loans are guaranteed and secured by the assets (not capital stock) of all major U.S. subsidiaries except Sands Bethworks Gaming LLC (SBG) and Sands Bethworks Retail LLC (SBR; together with SBG, PA Subsidiaries). Essentially, pledged hard asset collateral for LVS LLC consists of the company's Las Vegas assets, which generated $359 million of LTM Adjusted Property EBITDA.
Macao Related Debt
LVS' Macao operations are subsidiaries of Sands China Ltd., a Hong Kong-listed company, of which LVS Corp. has a 70.2% stake. The VML credit facility is the only major debt at Sands China and consists of a $3.2 billion term loan and a $500 million undrawn revolver as of Sept. 30, 2012. The facility is guaranteed and secured by all major Macao subsidiaries' assets including the Venetian Macao, Sands Macao, Four Seasons and Sands Cotai Central, which generated $1.8 billion of LTM Adjusted Property EBITDA.
The Parisian (Site 3) is owned by Venetian Cotai Limited (owner of the Venetian and the Four Seasons) and can be transferred to an unrestricted subsidiary or a third-party pursuant to section 7.7(xx) of the credit agreement.
Singapore Related Debt
The only major debt at MBS is the new SG$5.1 billion (US$4.16 billion) credit facility it entered into in June 2012. It consists of a SG$4.6 billion (US$3.75 billion) term loan and an undrawn SG$500 million (US$407.9 million) revolver. The facility is secured by all major assets of MBS, which generated $1.5 billion of LTM Adjusted Property EBITDA.
Fitch links the IDRs across all rated subsidiaries, which reflects:
--LVS Corp's organizational structure and dividend policy whereby 70.2% of any dividend paid by Sands China ($1.2 billion in 2012) goes to LVS Corp.
--International subsidiaries' ability to move cash freely to the U.S. given the subsidiaries' strong financial profiles and relaxed restricted payment covenants in the credit agreements (MBS recently eliminated an excess cash sweep requirement in its amended credit facility). Cash tax leakage is manageable as Macao's gaming tax generates foreign tax credits in the U.S., Macao's income tax is minimal and Singapore's tax rate is relatively low at 17%.
--Convergence of credit quality among the restricted groups with LVS paying down a significant amount of debt at the U.S. restricted group using cash generated elsewhere. U.S. debt declined by over 50% since year-end 2009 from $5.2 billion to $2.5 billion.
--The company's operational and strategic structure, which includes common brands, common management, and cross-marketing between properties and markets. Singapore and Macao have royalty fee agreements with LVS LLC, which owns LVS' trademarks. For the LTM period ending Sept. 30, 2012 these payments were $129 million.
Transaction Specific Ratings
The 'BBB-' ratings on the Macao and Singapore secured credit facilities reflect a one-notch positive differential from the 'BB+' IDR due to strong asset coverage. Fitch believes the Macao and Singapore facilities are well over-collateralized.
Asset collateral coverage for the LVS LLC secured credit facility is not as strong. LVS' Las Vegas assets generated $359 million in LTM Adjusted Property EBITDA, resulting in leverage of 7.0x, assuming no contribution from non-collateral assets. However, the LVS LLC credit benefits from its ownership in MBS, Sands China and PA Subsidiaries, which generate royalty fees and distributions for LVS LLC (restricted group leverage is 5.2x if royalty fees are included in EBITDA).
LVS trademarks are owned by LVS LLC and part of the collateral package. For the LTM period ending Sept. 30, 2012, the U.S. restricted group received $129 million in royalty fees associated with the trademarks from unrestricted subsidiaries including $98 million from MBS and $31 million from the Macao subsidiaries. Lenders should note that the U.S. credit agreement permits LVS LLC to transfer Intellectual Property to other unrestricted subsidiaries "in connection with a reorganization of the LVS Corp's and its Subsidiaries' portfolio of Intellectual Property" (section 6.7(t)).
CREDIT METRICS AND FINANCIAL POLICIES
LVS' credit metrics are strong for the 'BB+' IDR. Fitch calculates consolidated gross and net leverage for LTM period through Sept. 30, 2012 at 2.9x and 1.9x, respectively. Fitch's consolidated leverage calculations deducts corporate expense and minority interest from EBITDA and deducts cage cash from cash balances. Management has indicated a target net leverage range through development cycles of 1.5x-3.0x, which does not consider the above adjustments.
There would likely be rating pressure if Fitch forecasted gross and/or net leverage were to sustain above 5.0x and 4.0x, respectively, so there is ample headroom at the 'BB+' IDR for additional leverage.
If Fitch were to consider an upgrade to a 'BBB-' IDR, there would be little tolerance for gross and/or net leverage above 4.0x and 3.0x, respectively.
In November, LVS announced a 40% increase in regular dividends and a $2.25 billion special dividend payable Dec. 18th. The company retains ample financial flexibility to manage capital allocation policies with respect to returning cash to shareholders. Given the potential for lumpy capex if multiple projects were being developed at once, Fitch would assess how management demonstrates this flexibility when considering an upgrade to investment grade.
When pursuing new developments, LVS has indicated that it expects to contribute 25%-35% in equity to any new project. Adherence to stated financial policies is an important consideration for an investment grade IDR, so an upgrade could be precluded if a higher level of debt were planned for a project.
Free Cash Flow
LVS has been generating sizable discretionary FCF since second-half 2010, when Marina Bay Sands had its first full quarter of operations. As of Sept. 30, 2012, LTM discretionary FCF was roughly $2.4 billion before approximately $1 billion in development capex and nearly $1 billion in dividends.
Supported by Fitch's forecast of continued organic growth and further ramp up of Sands Cotai Central, annual discretionary FCF could approach $3 billion by the end of 2013. This should adequately cover the existing $1.15 billion regular LVS Corp. dividends ($1.64 billion if paid entirely by Sands China since 29.8% of its dividends goes to minority holders) and the development costs of The Parisian ($600 million in 2013 and $1.2 billion in 2014). Fitch expects the remaining cash to be allocated between repayment of debt (including scheduled amortization), funding additional growth capex, share repurchases and increasing regular dividends.
As of Sept. 30, 2012, LVS had $3.75 billion of cash on hand (includes approximately $400 million in cage cash, so excess/available cash is roughly $3.35 billion). Of the $3.75 billion, $1.55 billion is in Macao (70.2% owned by LVS), $673 million is in Singapore, $940 million is in the U.S. restricted group and $582 million is at the corporate level (or other subsidiaries).
LVS also has $1.4 billion in available revolver capacity ($500 million in U.S., $500 million in Macao and $402 million in Singapore) for total available liquidity net of cage cash of $4.7 billion. The amount that is available to the U.S. group is closer to $4.1 billion after accounting for the minority shareholders of Sands China. Some of this liquidity will be used to fund the $2.25 billion special dividend that was payable on Dec. 18, but liquidity will remain adequate for the ratings.
LVS has $98 million in debt coming due in 2013, $1.12 billion in 2014 ($769 million in non-extended U.S. loans), $1.73 billion in 2015 (mostly amortization of VMLF and MBS credit facilities) and $4.38 billion in 2016 ($1.38 billion in extended U.S. loans, $2.08 billion in VMLF loans and $906 million in MBS amortization).
LVS' credit facilities have leverage based maintenance covenants but there is considerable cushion at each restricted group. (The U.S. covenant is very accommodating, as it includes international earnings in the calculation to the extent there is cash dividends).
Reported inquiries into the company's alleged non-compliance with Foreign Corrupt Practices Act (FCPA) and Anti-Money Laundering (AML) laws is an overhang for the credit profile that Fitch has factored into the 'BB+' IDR. In Fitch's opinion, the most plausible risk stemming from allegations is an assessment of a fine(s), which should be easily absorbed in LVS' financial profile, judging by FCPA/AML case precedents. See Fitch's report titled U.S. Foreign Corrupt Practices Act -- No Minor Matter (dated June 1, 2010) for analysis of some of the higher profile FCPA cases and their credit implications.
A more serious tail risk concern is the risk of LVS losing a gaming license or concession in one of the jurisdictions in which it operates. However, Fitch considers this a low probability risk when taking into account that revocations of gaming licenses are rare (and unprecedented in Singapore and Macao) as well as LVS' significant market share and invested capital in these more critical markets.
Macao and Singapore account for 92% of the company's LTM property EBITDA. LVS maintains approximately 50% and 20% gaming revenue market share in Singapore and Macao, respectively, and through Sept. 30, 2012 LVS spent $4.6 billion and $8.4 million on capex in the respective markets.
Macao (51% of LTM Property EBITDA)
LVS is well positioned in Macao with approximately 1 million square feet of gaming space in the market. This gaming space plus an extensive complement of amenities and hotel rooms allows LVS to freely adjust to the demands of the market, which Fitch believes will skew towards the mass market in the near-to-medium term. The gaming space permits LVS to move the tables that it is allocated by Macao government between mass and VIP business as conditions warrant without making major reconfigurations or structural changes to the gaming space, a luxury that most other operators do not have. The space also permits LVS to more heavily utilize electronic tables games (ETGs) and slots, which is becoming a more meaningful segment in Macao and for which there are no unit restrictions.
Fitch forecasts 12% gaming revenue growth for Macao for full year 2012 (13% year-to-date through November) and 8% growth in 2013. In 2013, growth will be led by double-digit growth in the mass market with VIP lagging in the low-to-mid single digit range. Fitch expects LVS to exceed Fitch's 2013 forecast for the market due to the capacity factor discussed above and the additional allocation of table games that LVS expects by early 2013, which would bring its total mass market tables above 1,000.
LVS' Sands Cotai Central, which opened in April 2012 and is opening additional phases through 2012 and into 2013, will be the last major casino to open in Macao until at least mid-2015 when a series of new gaming projects are expected to roll out including LVS' own $2.7 billion The Parisian. The company will contribute $800 million in equity towards the project, with the remainder being funded through project financing according to the company's third-quarter earnings presentation.
Singapore (42% of LTM Property EBITDA)
In Singapore, LVS benefits from a regulated duopoly at least through 2017, when the government can issue additional licenses. LVS' only competition in the meantime is Genting Singapore's Resorts World Sentosa, which is more family oriented compared to Marina Bay Sands.
Marina Bay Sands opened in April 2010 and is largely ramped up with an-adjusted LTM EBITDA of $1.5 billion for period ending Sept. 30, 2012. Further growth will be hindered by gaming position constraints imposed by LVS' Development Agreement, which limits the gaming floor area to 15,000 square meters, which translates into approximately 161,000 square feet (Marina Bay Sands has 160,000 square feet of gaming space). Also Marina Bay Sands may not have more than 2,500 gaming machines; however, there are no limits on table games. In the third-quarter 2012, Marina Bay Sands on average had 2,441 machines and 619 table games.
Fitch does expect some incremental EBITDA growth to result from further refining the gaming customer mix (VIP has an effective tax of 8.5% vs. 20.5% for mass table and slots). The company has also expressed a desire to expand its hotel, which reached occupancy of 99.8% in third-quarter 2012 with an ADR of $361. Hotel represents only about 10% of the property's gross revenues but the extra rooms would help LVS better yield its gaming space as well the ancillary segments such as retail and convention business.
United States (12% of LTM Property EBITDA)
About two-thirds of U.S. property EBITDA is generated by the Venetian and Palazzo properties on the Las Vegas Strip. Fitch maintains a favorable outlook for the Strip operators, which should benefit from no meaningful new supply coming on-line for another three to five years. Year-to-date through September the Strip gaming revenues are up 2.5% and Fitch expects similar trend to continue into 2013 with strong international play growth offsetting more lackluster domestic table and slot play. LVS' properties should be able to capture fair share of the international play given the opportunity to cross-market with the company's international properties.
The balance of U.S. property EBITDA (almost a third) is generated by Sands Bethlehem in eastern Pennsylvania. Sands Bethworks LLC, the subsidiary holding the gaming license, is 86.4% owned by LVS with the remainder owned by third-party investors.
WHAT COULD TRIGGER A RATING ACTION
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
--Maintaining leverage below 4x on gross basis and 3x on net basis for an extended period;
--Keeping to its articulated financial policies including contributing at least 25% equity towards projects, and/or
--Favorable resolution of inquiries and lawsuits related to governance matters discussed above.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
--Leverage exceeding 5x on gross basis and 4x on net basis for an extended period, likely driven pursuing multiple large-scale projects at once;
--Deviating from to its articulated financial policies including contributing at least 25% equity towards projects, and/or
--Loss of a license/concession related to inquiries related to governance matters discussed above.
Fitch assigns ratings to Las Vegas Sands Corp and subsidiaries as follows:
Las Vegas Sands Corp.
--Issuer Default Rating (IDR): 'BB+', Outlook Stable.
Las Vegas Sands LLC
--IDR: 'BB+', Outlook Stable;
--US$500 million secured revolving credit facility: 'BBB-';
--US$1.8 billlion secured term loan B: 'BBB-';
--US$608 million secured delay draw 1 & 2: 'BBB-'.
Sands China Ltd.
--Issuer Default Rating (IDR): 'BB+', Outlook Stable.
VML US Finance LLC
IDR: 'BB+', Outlook Stable;
--US$500 million Macao secured revolving credit facility: 'BBB-';
--US$3.2 billion Macao secured term loan: 'BBB-'.
Marina Bay Sands Pte. Ltd.
--IDR: 'BB+', Outlook Stable;
--SGD 500 million Singapore secured revolving credit facility: 'BBB-';
--SGD 4.6 billion Singapore secured term loan: 'BBB-'.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Parent and Subsidiary Rating Linkage' (Aug. 8, 2012);
--'Recovery Ratings and Notching Criteria for Nonfinancial Corporate Issuers' (Aug. 14, 2012);
--'2012 Outlook: Gaming -- Market Exposure the Differentiating Factor' (Dec. 13, 2011).
Applicable Criteria and Related Research:
Corporate Rating Methodology
Parent and Subsidiary Rating Linkage
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers
2012 Outlook: Gaming -- Market Exposure the Differentiating Factor
Michael Paladino, CFA
One State Street Plaza
New York, NY 10004
Alex Bumazhny, CFA
Brian Bertsch, +1-212-908-0549 (New York)