LVS: MACAU MARGINS AND LIMBOING THE COVENANT BAR

We've been pretty negative on LVS over the last month so some may be surprised to see us pull a u-turn.  The issues haven't changed but price and duration have.  Q2 margins in Macau will look better than people think as the company readies itself for an IPO and pushes itself to limbo underneath the covenant bar.

LVS has fired and laid off many employees in Macau, including a number of senior level management folks.  Look for a decent size number in the one-time expense bucket for Q2 and Q3.  The layoffs and charge-offs should have the effect of pumping margins.  Sustainability is certainly a question mark but given the high short interest and volatility, investors likely won't scrutinize that aspect over the near-term.

Better Macau margins will also partially alleviate covenant concerns.  Moreover, LVS can exclude one-time charges from the leverage covenant calculation - even more incentive to fill the 1x bucket.  A Q3 covenant bust has been all the talk from the sell side.  However, Sheldon is right.  LVS will not bust a covenant.  Even though a Macau IPO will not likely float until Q4, the promise of one will allow the banks to be much more flexible with a covenant waiver or amendment.  LVS still has the debt buyback lever per the 4/15 amendment that allows them to repurchase up to $800 million of its term loan debt (trading at a discount).  Investors should worry about borrowing costs going up, but not a covenant bust or imminent bankruptcy.  We will have a more detailed, numbers-oriented post on the covenant issue coming soon.

The stock looks like it is going a lot higher over the near-term, at least through the Q2 earnings release in early August.  We still harbor concerns with MASSive amount of table supply entering the Macau market, particularly Oceanus next to Sands.  The Singapore ramp is also a worry especially considering the uncertainty of the junket situation - can they get licensed and can they offer credit?  However, keep a trade a trade as they say.


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