April 5, 2012 / 3:42 PM / 6 years ago

TEXT-S&P raises Las Vegas Sands ratings

Overview	
     -- We believe gaming operator Las Vegas Sands Corp.'s financial
profile has improved to the point that it supports a higher rating, even
incorporating aggressive development spending over time.	
     -- We are raising our corporate credit rating on Las Vegas Sands to 'BB+' 	
from 'BB'.	
     -- We are also revising our recovery rating on the company's U.S. senior 	
secured credit facilities to '2' from '3' and raising our issue-level rating 	
to 'BBB-' from 'BB', reflecting the recent redemption of its senior notes.	
     -- The positive rating outlook reflects our view that further rating 	
upside is possible based on our current performance expectations, particularly 	
in the event of a strong ramp-up of Sands Cotai Central.	
	
Rating Action	
On April 5, 2012, Standard & Poor's Ratings Services raised its corporate 	
credit rating on the Las Vegas Sands Corp. (LVSC) family of companies to 'BB+' 	
from 'BB'. Aside from Las Vegas Sands Corp., the LVSC family of rated 	
companies includes Las Vegas Sands LLC, its Venetian Casino Resort LLC 	
subsidiary, and affiliate VML U.S. Finance LLC (VML). At the same time, we 	
removed all ratings on the company from CreditWatch, where they were placed 	
with positive implications on Feb. 7, 2012. The rating outlook is positive.	
	
In addition, we revised our recovery rating on LVSC's U.S. senior secured 	
credit facilities to '2' from '3'. The '2' recovery rating indicates our 	
expectation for substantial (70% to 90%) recovery for lenders in the event of 	
a payment default. Our revised recovery rating follows the recent redemption 	
of the company's 6.375% senior notes, which shared in the security package 	
pari passu with obligations under the credit facilities. With the lower amount 	
of secured debt outstanding, this results in improved recovery prospects for 	
the U.S. credit facilities under our simulated default scenario.	
	
We also raised our issue-level rating on VML's $3.7 billion senior secured 	
credit facility to 'BB+' from 'BB', reflecting the one-notch rise in our 	
corporate credit rating. 	
	
Rationale	
The upgrade reflects our belief that, under our updated intermediate-term 	
performance expectations, LVSC will maintain credit measures comfortably 	
within our threshold for a 'BB+' corporate credit rating, even incorporating 	
aggressive development spending over time. Given our assessment of LVSC's 	
business risk profile, we would be comfortable with leverage temporarily 	
spiking as high as 4.5x to fund development projects, but generally consider 	
leverage closer to 4.0x to be in line with a 'BB+' corporate credit rating. As 	
of Dec. 31, 2011, our measure of LVSC's leverage was 3x, which provided a 1x 	
cushion relative to this threshold, while unrestricted cash balances were 	
nearly $4 billion. While additional development opportunities, whether in the 	
U.S. or abroad, will likely take at least a few years to come to fruition, we 	
expect that LVSC will aggressively pursue them and potentially seek multiple 	
opportunities at once. Therefore, we view a leverage cushion and large cash 	
balances as necessary to preserve flexibility in the event opportunities arise 	
and/or to protect against unexpected performance volatility.	
	
The positive rating outlook reflects our view that further rating upside is 	
possible, based on our current performance expectations. For Las Vegas Sands 	
to achieve a higher rating (and investment-grade status), we would be 	
comfortable with leverage temporarily spiking to the high-3x area to fund 	
development projects, but generally consider leverage closer to 3x in line 	
with a 'BBB-' corporate credit rating. In the event of a strong ramp-up of 	
Sands Cotai Central over the next several quarters, we believe an upgrade to 	
'BBB-' is possible, as we would expect leverage to improve to below 2.5x by 	
early 2013. An investment-grade rating on Las Vegas Sands, however, would also 	
require management to publicly articulate a financial policy around its 	
tolerance for leverage that is aligned with our leverage threshold.	
	
Our 'BB+' corporate credit rating on LVSC reflects our assessment of the 	
company's business risk profile as "satisfactory" and its financial risk 	
profile as "significant."	
	
Our assessment of LVSC's business risk profile as satisfactory reflects the 	
company's leading presence in the three largest global gaming markets, 	
high-quality assets and well-known brands, and an experienced management team. 	
These business strengths are somewhat offset by the gaming industry's 	
vulnerability to economic cycles given its discretionary nature, the high 	
levels of competition in the Las Vegas and Macau gaming markets, and 	
management's aggressive expansion strategy.	
	
Our assessment of LVSC's financial risk profile as significant takes into 	
account the company's large debt burden and track record of adding substantial 	
leverage to fund development opportunities. Still, notwithstanding these 	
factors, we expect LVSC's strong liquidity position to allow it to pursue and 	
finance developments in a manner that preserves credit quality in line with 	
the current rating. In addition, the company is currently pursuing a 	
refinancing at its Singapore subsidiary, which will extend debt maturities, 	
substantially reduce its interest burden, eliminate amortization payments over 	
the next few years, and increase flexibility to pay cash distributions.	
	
Additional risk factors we are monitoring are related to LVSC being subject to 	
multiple lawsuits and investigations, including the following:	
     -- An action filed by the former CEO of Sands China alleging the 	
company's breach of his employment contract and tortious discharge; and	
     -- An investigation by the SEC and the Department of Justice relating to 	
compliance with the Foreign Corrupt Practices Act.	
	
While the timeframe within which these issues will be resolved is unclear, as 	
is the extent to which any potential judgment against LVSC would impact credit 	
quality, these issues may weigh on ratings upside until we have further 	
clarity around potential judgments or they are resolved.	
	
When assessing LVSC's credit quality, we consider the consolidated entity, 	
despite the distinct financing structures at parent company LVSC and its U.S., 	
Macau, and Singapore subsidiaries. We deem the strategic relationship between 	
the parent and each subsidiary as an important factor that has a bearing on 	
the credit quality of the overall consolidated entity. However, in notching 	
our issue-level ratings from the corporate credit rating, we recognize the 	
distinct financing structures and associated collateral.	
	
Our rating incorporates the following specific performance expectations:	
     -- For LVSC's Las Vegas properties, we are assuming net revenue growth in 	
the mid-single-digit percentage area in 2012 and 2013. We are also 	
incorporating an expectation that property EBITDA margin gradually improves to 	
about 26% in 2013 from 25.2% in 2011. This scenario would result in property 	
EBITDA growth averaging about 8% per year over this timeframe. This outlook 	
incorporates our economists' current forecast that growth in U.S. real GDP and 	
consumer spending will both average about 2% over the next two years. We 	
believe the Las Vegas Strip should realize at least modest growth in gaming 	
revenues over this timeframe as the economy continues to gradually improve. 	
Additionally, Las Vegas visitation trends remain solid, which, combined with 	
ongoing improvement in group booking levels, should support continued strong 	
occupancy at LVSC's properties in at least the high-80% area and continued 	
improved average daily rates during this period.	
     -- For the Sands Bethlehem property, we are assuming growth in net 	
revenues and property EBITDA in the high-single digits in 2012, reflecting 	
continuing benefits from the addition of table games and the recent opening of 	
the hotel. In 2013, we are assuming more modest growth in both net revenues 	
and property EBITDA, resulting in EBITDA reaching about $100 million by the 	
end of 2013.	
     -- For LVSC's three existing Macau properties, we are assuming a net 	
revenue decline of 2.5% in 2012, reflecting competitive pressure from Sands 	
Cotai Central, followed by modest growth in 2013. We are also incorporating an 	
expectation that property EBITDA margin weakens by approximately 200 basis 	
points (bps) in 2012 and rebounds slightly 2013, which would result in a 	
slight decline in EBITDA over the next two years. While growth in Macau has 	
greatly exceeded our expectations in recent years and we expect the market to 	
grow in the 10% to 15% range this year, we believe the recently opened Galaxy 	
resort in Cotai, in addition to Sands Cotai Central, will account for much of 	
the growth in the Macau gaming market over the next few years. Still, based on 	
our economists' current forecast that growth in real GDP in the People's 	
Republic of China will remain in the high-single-digit percentage area over 	
the next few years, we believe LVSC's existing three properties will benefit 	
from at least modest revenue growth after 2012 despite substantial new 	
capacity entering the market. Tourists from China, along with those from Hong 	
Kong, consistently comprise over 80% of visitation to Macau.	
     -- For LVSC's Sands Cotai Central development, the rating incorporates a 	
gradual ramp-up of cash flow as the properties begin their phased opening this 	
month. Specifically, we have factored property EBITDA of about $250 million 	
and $440 million in 2012 and 2013, respectively, into our rating.	
     -- For the Marina Bay Sands property in Singapore, we are incorporating 	
an expectation for net revenue growth averaging about 5% per year in 2012 and 	
2013. We are also incorporating an expectation that property EBITDA margin 	
stabilizes at about 52%, consistent with performance during 2011, which would 	
result in EBITDA approaching $1.7 billion in 2013. This growth trend is 	
relatively in line with our economists' current base case forecast for GDP 	
growth of 5% in Singapore, and also incorporates our view that current hotel 	
capacity could somewhat constrain growth in 2012 and 2013 (occupancy levels 	
exceeded 90% in 2011).	
	
Based on these performance expectations, we expect consolidated net revenues 	
and EBITDA to grow approximately 10% in 2012 and 2013. This would result in 	
consolidate leverage improving to below 2.5x by the end of 2013 and cash 	
balances in excess of $4 billion.	
	
Liquidity	
Based on the company's likely sources and uses of cash over the next 12 to 18 	
months and incorporating our performance expectations, LVSC has a "strong" 	
liquidity profile, according to our criteria. Relevant factors in our 	
assessment of LVSC's liquidity profile include the following:	
     -- We expect the company's sources of liquidity over this period to 	
exceed its uses by 1.5x or more and believe that sources would exceed uses, 	
even if forecasted EBITDA were to decline by 30%. 	
     -- We believe that LVSC has sufficient covenant headroom under the 	
proposed new Singapore credit facilities and its existing VML credit 	
facilities, such that a 30% decline in forecasted EBITDA would not result in a 	
breach of financial covenants.	
     -- Covenant cushion relative to the consolidated leverage ratio under the 	
U.S. credit facilities will tighten over the next several quarters as the 	
covenant level gradually steps down to 5x by the third quarter of 2012 from 6x 	
as of Dec. 31, 2011. Still, we are comfortable that LVSC's meaningful excess 	
cash balances and ability to pay dividends from the Macau and Singapore 	
subsidiaries (which would be recognized as EBITDA under the U.S. credit 	
agreement) provide the flexibility to ensure covenant compliance.	
	
LVSC derives liquidity from excess cash balances, in addition to revolver 	
availability and cash generated at its U.S., Macau, and Singapore 	
subsidiaries. As of Dec. 31, 2011, LVSC had approximately $520 million of 	
borrowing capacity under the U.S. revolving credit facilities and full 	
availability under its $500 million Macau revolving credit facility. The 	
proposed Singapore credit facilities include a Singapore dollar (SGD) 500 	
million revolver, which will have about SGD 385 million drawn at closing. We 	
also expect LVSC to benefit from enhanced flexibility to upstream cash 	
generated in Singapore under the proposed new credit facilities, similar to 	
its VML facilities. LVSC's ability to move cash from the U.S. entity is 	
somewhat restricted. 	
	
During 2011, LVSC generated approximately $2.6 billion in operating cash flow, 	
which funded about $1.5 billion of capital expenditures, $75 million of 	
dividends paid to preferred stockholders, and the redemption of the preferred 	
shares in November 2011. We have assumed aggregate capital expenditures across 	
the portfolio will approach $3 billion in 2012 and 2013 as the company 	
completes development of its phased Sands Cotai Central development. This 	
assumption incorporates some cost overruns with the project. Under our 	
operating assumptions, expected liquidity is sufficient to fund currently 	
planned development activity and support covenant compliance without requiring 	
any further borrowings. 	
	
Aside from modest amortization payments scheduled under the U.S. credit 	
facilities, pro forma for the proposed new Singapore credit facilities, debt 	
maturities in 2012 and 2013 are minimal. Other uses of cash include a dividend 	
to common shareholders, as the company recently declared a $1.00 per share 	
(approximately $823 million) annual dividend.	
	
Outlook	
The positive rating outlook reflects our view that a higher rating is possible 	
over the next several quarters, based on our current performance expectations. 	
To raise the rating further (into investment-grade status), we would be 	
comfortable with leverage temporarily spiking to the high-3x area to fund 	
development projects, but generally consider leverage closer to 3x to be in 	
line with a 'BBB-' corporate credit rating. In the event of a strong ramp-up 	
of Sands Cotai Central, we believe an upgrade to 'BBB-' is possible, as we 	
would expect leverage to improve to below 2.5x by early 2013. An 	
investment-grade rating on Las Vegas Sands, however, would also require 	
management to publicly articulate a financial policy around its tolerance for 	
leverage that is aligned with our leverage threshold at a 'BBB-' rating. In 	
addition, while the timeframe within which the aforementioned lawsuits and 	
investigations will be resolved is unclear, as is the extent to which any 	
potential judgment against LVSC would impact credit quality, these issues may 	
weigh on ratings upside until we have further clarity around potential 	
judgments or they are resolved.	
	
A revision of the rating outlook to stable or a downgrade could result from 	
performance meaningfully below our expectations, or from the company taking a 	
more aggressive posture toward additional development opportunities, resulting 	
in a sustained spike in leverage to above 4x.	
	
Related Criteria And Research	
     -- Methodology And Assumptions: Liquidity Descriptors For Global 	
Corporate Issuers, Sept. 28, 2011	
     -- Criteria Guidelines For Recovery Ratings, Aug. 10, 2009	
     -- Business Risk/Financial Risk Matrix Expanded, May 27, 2009	
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008	
	
Ratings List	
	
Upgraded And Removed From CreditWatch	
                                   To             From	
Las Vegas Sands Corp.	
Las Vegas Sands LLC	
Venetian Casino Resort LLC	
 Corporate Credit Rating           BB+/Positive   BB/Watch Pos	
	
VML U.S. Finance LLC	
 Corporate Credit Rating           BB+/Positive   BB/Watch Pos	
 Senior Secured                    BB+            BB/Watch Pos	
	
Upgraded And Removed From CreditWatch; Recovery Rating Revised	
                                   To             From	
Las Vegas Sands LLC	
 Senior Secured                    BBB-           BB/Watch Pos	
   Recovery Rating                 2              3	
	
Ratings Withdrawn	
                                   To             From	
Las Vegas Sands Corp.	
 Senior Secured                    NR             BB/Watch Pos	
   Recovery Rating                 NR             3

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