THE UPSIDE OF BEING LEVERED

For the first time during this credit crisis, the gaming operators can see a silver lining in their cloudy financial positions. The three month LIBOR has plunged to 1.09%. All of these companies maintain significant borrowings off of their credit facilities where the interest rate is determined by a (tiny) spread over LIBOR. The EPS tailwind for 2009 EPS is huge. We are not big EPS followers at Research Edge, but the low rate environment will have a big positive impact on cash flow.

Rock bottom LIBOR alone doesn’t pull these guys out of the debtor’s prison they put themselves in. Taking on excessive debt levels to invest in low ROI projects was a strategy that was destined to fail. Fail it did; shareholders and bondholders have paid the price. Unfortunately, that is a sunk cost. On the margin, the liquidity picture may be looking a bit brighter.

The following charts examine the 2009 financial impact from LIBOR going from just over 3% in late October to the current rate of 1.09%. We looked at late October as the starting point because the companies last gave guidance during the Q3 earnings season. Moreover, that may be the last time many analysts updated their models.

ASCA, BYD, LVS and MGM are the biggest beneficiaries in terms of EPS and cash flow. These companies all maintain very attractive credit facilities and significant borrowings off of those facilities. BYD should receive the largest boost with the October to January decline in LIBOR impacting EPS by 46%. ASCA and MGM are on track for over a 30% increase each. In terms of cash flow, LVS, ASCA, and BYD could all see interest cost savings in excess of 10% of their projected 2009 EBITDA.

Combined with deleveraging bond buybacks, the low rate environment should help MGM and BYD get through 2009 without busting covenants. This will put BYD in the clear for 2010 and beyond but MGM still needs new financing to avoid covenant breaches in 2009. The problem for LVS is the leverage covenant in its Macau bank facility which will likely be breached even with the lower rates. Similarly, ASCA faces a potential Q2 senior leverage covenant breach.

Of course, this analysis assumes a) rates will persist here for all of 2009 and b) analysts have not updated their interest rate assumptions since late October. The actual impact is likely to be less, due to a) and b) above, and worse operating trends. However, while investors have certainly focused on the operating fundamentals, we don’t believe the LIBOR tailwind is appropriately reflected in some of the stocks.


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