So on that note, let us give you some background on the $3.3BN Macau Facility. The maximum consolidated leverage for the Macau facility is currently 4.5x, stepping down to 4.0x for the period ending March 31, 2009, and 0.5x thereafter every six months to a final level of 3.0x for the period ending March 31, 2010. At 12/31/2008, leverage at the Macau entity was 4.0x. Like the US facility, the Macau facility allows for $40MM of “equity contributions” towards the TTM EBITDA calculation and pro-forma treatment of new developments (like Four Seasons). Unlike the US facility though, the debt calculation is a gross one.
At 12/31/2008 there was $490MM of cash at the Macau entity, most of which will be used towards Capex on sites 5 & 6 and the completion of the FS condos. However, once LVS complete shuttering Sites 5&6 and the FS condos, the Macau subsidiary could generate approximately $400-$500MM of FCF annually. If LVS manages to negotiate an amendment or raise enough capital, through either asset sales or an IPO of a minority stake in the Macau sub, it can use this cash flow to complete Sites 5 & 6, which will then allow it to de-lever further.
According to our math, barring an asset sale, LVS will trip its maximum leverage covenant by 3Q09. We believe that LVS would be able to get an amendment (requires a 51% vote) to keep the maximum leverage level at 4.5x. In order to get the amendment, we believe that LVS would have to pay an additional 300 bps or so (~100MM in incremental interest expense), plus provide additional protection to the lenders. This would probably eliminate LVS’s ability to get any cash out of Macau. Nonetheless, if the covenant was raised to 4.5x (current level), that would give them ample breathing room to recommence and complete Sites 5 & 6. This would allow them to further de-lever and create additional equity value at the sub.
The current credit agreement has a restricted payments basket of $800MM, of which $300MM is unused. LVS made $1.3BN of loans to the Macau subsidiary, which it can get back after some tax penalty. Finally, in the event of an asset sale, LVS can repatriate 25% of the proceeds. I mention this, because given the situation at the US subsidiary, being able to bring back cash, albeit after some tax penalty is very important to the company. We suspect, should LVS need an amendment, the bank group will seek to close these loop holes. For this reason, we believe that company is fervently pursing all of the options to sell assets.
Some assets will probably not be sold. LVS cannot sell Sites 5 & 6 because they do not have a concession on that land. Even if they did, there are no motivated buyers for that land, given LVS’s “distressed” situation. LVS cannot sell the retail in Singapore without approval from the government because there is a 10 year moratorium on selling the property, and we doubt that the government of Singapore will change that rule given the political issues surroundings such a move. Even if LVS can do some sort of forward sale on the Singapore retail, they cannot do so before that property opens which is after 3Q09.
So what assets can they sell? Obviously the best option is to sell the FS condos since those are non-cash generating assets. LVS may want $1BN from the sale of the residences, but we believe a number closer to the cost of approx $400MM is more likely if a sale occurs.
Then there’s the retail, which has a current NOI run rate of $130MM. However, many of the retailers will not be able to sustain current rent payments given the slower than expected ramp in sales. Therefore, LVS will likely offer these tenants percentage base rents instead of base rents in return for longer term commitments. A more sustainable NOI number is closer to $100MM. Assuming a 10% cap, we believe that LVS can clear about $800MM of net proceeds. LVS can try to sell the Sands, which had a run-rate EBITDA of roughly $200MM. This asset would likely be attractive to a wealthy national or Chinese sovereign fund that doesn’t need to depend on junkets. We believe that the Sands could fetch net proceeds btw $1.3-1.7BN. The only issue is that a sale of the Sands would require 100% lender approval.
Lastly, LVS can try to spin-off a minority stake in Macau and Singapore to raise cash. This is clearly complicated given that the HK market hasn’t been so open to IPOs of late. This could be the most attractive option if the market could provide a multiple of 8x or more. Our guess is that given the gun to its head, LVS will do some combination of the above to avoid a breach.
As can be seen in the grid below, there is significant equity value if LVS clears the covenant hurdle. We calculate the Macau subs could be worth $6-7 per share if they do.