We’ve gone through the painstaking details of the credit documents, worked the math, and performed the analysis. In other words, we’ve done the work. The good news: it looks like LVS will probably clear its 7.0x Consolidated Leverage Ratio covenant on its US facility, due primarily to a creative definition of Consolidated Adjusted EBITDA. The bad news: we can’t say the same for the Maximum Consolidated Leverage Ratio in their Macau facility.

As can be seen in the first chart, LVS should make it through 2010 without breaching the leverage covenant in the US facility. At the end of 3Q08, LVS just skated under its maximum allowable leverage under its US facility with leverage of 7.45x vs a 7.5x test. Subsequently, LVS raised $2.1BN of cash through an equity and preferred offering. Total Consolidated Debt is defined as total debt at the US subsidiary level less cash in excess of $75MM. We estimate that net debt goes from $4.15BN in 3Q08 to $2.8BN in 4Q08. The US facility’s definition of Consolidated Adjusted EBITDA also allows for up to $100MM of equity contributions ($50MM per every other quarter) for every TTM period to be counted as an addback to EBITDA. The facility also allows for the addback of interest on its $250MM 6.375% Sr Notes. Therefore our leverage calculation for 4Q08 drops to 5.5x, before climbing to 6.3x in 1Q09. Without the $58MM in addbacks to Adjusted EBITDA, LVS would most likely breach the 7.0x leverage covenant in 1Q09.

Now the bad news. Even if LVS clears the debt covenants in its US Credit Facility, it may not be out of the woods. According to our calculations as seen in the second chart, the company is dangerously close to tripping its Maximum Consolidated Leverage Ratio in their Macau facility and will likely trip the covenant in the 2Q09. Similar to the US Credit Facility, the Macau facility allows for numerous addbacks to its Consolidated Adjusted EBITDA calculation, including (for a TTM period) up to $80MM of equity contributions, $10MM of corporate expenses, $15MM of non-recurring charges, and $10MM in uncapitalized non-recurring expenses in relation to a financing transaction. However, given the current debt balance in Macau, minimum required EBITDA to meet the leverage test would need to grow $220MM over TTM EBITDA in 3Q08 by 2Q09 to make-up for the step-down in the allowable leverage ratio from 4.5x to 3.5x, and by $387MM by 4Q09 when maximum allowable Consolidated Leverage steps down to 3.0x.

Given our views of Macau fundamentals, we believe that despite the opening of the Four Seasons last quarter and newly in-place cost controls, LVS’s Macau EBITDA will only experience modest growth in 2009. The Macau market faces many challenges including player credit, new competition, and visa restrictions. Barring an asset sale, we do not see how LVS can avoid tripping their leverage covenants in Macau. Unfortunately for LVS, the market for retail and condo/hotel assets could not be worse right now.

Anna Massion