LVS jumps over another balance sheet hurdle. More hurdles to go, but as we’ve indicated in the past, they all look surmountable. 


Shortly before the close, LVS announced that it had completed its Second Amendment to its Macau Credit facility providing six quarters of covenant relief and certain other amendments for a cost of 325bps of incremental spread.  As we wrote about in our 7/31/09 post, “LVS: A DETAILED CREDIT ANALYSIS”, we thought an amendment was likely given that the maximum permitted leverage was stepping down to 3.5x in the quarter ending September 2009.


While the 325bps increase in spread is higher than most of the recent amendments we’re seen, we would note that LVS got a lot of other “goodies” with this amendment, detailed below, without having to give up any “goodies” like closing the loophole for Permitted Distributions back to the parent.


We believe that the next balance sheet related catalyst for LVS is going to be the filing of its IPO prospectus over the next one-to-three weeks.  Since LVS has about $1.2BN of “intercompany loans” between the VML and the corporate entity, LVS can divide proceeds from the Macau IPO back to the US in a tax efficient manner by classifying them as a loan repayment (while dividing back earnings generated in Macau would be subject to up a 35% tax rate).  A large enough dividend would permit LVS to avoid amending their US facility and allow them to keep borrowing at a rate of sub 3% for the next few years.


Below is a summary of the key changes under the Second Amendment.

  • 1.0x increase in the Macau Subsidiary’s Maximum Consolidated Leverage Ratio for the next four quarters, and a 0.5x increase for the September 2010, and Dec 2010 quarters.  Below are the new Maximum Consolidated Leverage Ratio covenant levels:
    • 3Q09 – 4Q09: 4.5x (vs. 3.5x)
    • 1Q2010- 2Q2010: 4.0x (vs. 3.0x)
    • 3Q2010-4Q2010: 3.5x (vs. 3.0x)
    • 2011- Maturity: 3.0x (vs. 3.0x)




  • Permits LVS to sell a minority interest in the Macau Subsidiary (“VML”), through an amendment of the definition of “Change of Control” to require the Company to own at least 50.1% of the common equity interest in VML from 100%.
    • Provided that following any Equity Sale an amount equating to the lesser of the net offering proceeds and $500MM must be applied to repay all classes of the Credit Facility on a pro-rata basis
  • Permits issuance by VML of up to $1BN of senior secured notes ranking pari-passu with loans under the Credit Facility, providing that net proceeds from the issuance of such notes are applied to prepay outstanding amounts under the credit facility
  • Permits issuance by VML of up to $500MM of senior unsecured notes ranking junior with loans under the Credit Facility, providing that, pro-forma for the issuance the consolidated leverage ratio is below 3.0x and, at the maturity of such notes, is outside the final maturity of the credit agreement (May 2013)
  • Allows VML to enter into a new delay draw R/C after the expiration of its current R/C portion of the credit facility (May 2011) in an amount not to exceed the current R/C ($700MM)
  • Amended the definition of Consolidated Adjusted EBITDA for the quarters ending 3Q09, 4Q09, and 1Q2010 to include certain identifiable cost savings up to $40MM, $19MM and $12MM, respectively, to the extent that such cost savings are not fully reflected in the applicable TTM period
  • Amends the definition of Permitted Liens to accommodate the amendment which permits the issuance of secured debt
  • Increases the applicable interest rate margins for all classes of loans by 3.25%, the Credit Facility is reduced by $500MM, after which the rate increase will drop to 2.25%
  • New spread is L + 550bps, (vs current rate of L + 225bps) and decreasing to L + 450bps pursuant to a $500MM reduction in facility size (to $2.8BN from $3.3BN)

We’ve been on the optimistic side of the LVS credit situation since the stock was at $2.  The remaining balance sheet issues should not be a problem.  Consistent with our call in “LVS: CHINA FORCING THE ISSUE”, LVS (maybe with Beijing’s help) will try and resume construction on Lots 5 and 6 on Cotai.  While we still don’t expect any cash flows from Singapore until May at the earliest, LVS will likely emerge from this cash crunch in decent shape next year. 

Q2 European GDP Released

European markets traded higher today on Europe’s Q2 GDP numbers. Today’s report from Eurostat helps confirm the improving fundamental landscape for the region that we have been reporting on, as Eurozone growth declined 0.1% on the quarter,  but rebounded substantially from Q1’s 2.5% contraction.


For more on our Western European view, see our post “Taking Cues from Europe’s Larger Economies” on 8/11, however as a call-out, today’s numbers on an individual country basis further substantiate the divergence among Western Europe’s larger economies:  Germany and France rose 0.3% in Q2 quarter-on-quarter, while Italy and the UK, though improving sequentially, still registered in negative growth territory at -0.5% and -0.8% respectively (See chart below). On an annual basis all countries lie firmly in negative territory, yet when comparing Q2 annual results with Q1 year-on-year, Germany and France saw improvement, while Italy was unchanged and the UK declined.


As we measure the relative winners and losers in Europe, GDP remains a lagging indicator, yet markets trade day-to-day on lagging indicators as our CEO Keith McCullough has alluded to many times.  The DAX closed up over a percent today and the Euro and Pound moved higher versus the USD. As a side note relating to our German thesis, today’s positive GDP number should provide further support for Chancellor Angela Merkel’s CDU party, who is polling over a 30% spread over her challenger Frank-Walter Steinmeier of the Social Democrats, as national elections approach on September 27th.


Matthew Hedrick


Q2 European GDP Released - MH1


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When Bad News Is Good...

On a week over week basis, this morning’s jobless claims number was worse (see chart below -558,000 vs -554,000 in the week prior). Although its on a very tight duration, on the margin, this number is what it is – worse…


But, there’s this thing we have been following called the US Dollar. Yes, that thing that Bernanke is Burning…


The buck broke down on the “news”, supporting further strength in everything that’s priced in those Burning Bucks.


Chaos theory is a beautiful mathematical reality – it boils things down to a very deep simplicity.


Dollar down = everything else up.



Keith R. McCullough
Chief Executive Officer

When Bad News Is Good... - a1

Back to School, Back to Footwear?

We are beginning to see positive back to school trends develop within the sports apparel and athletic footwear data.  Footwear sales picked up measurably, breaking into positive growth territory for the first time in 17 weeks with a 4.9% increase.  Along with total sales, ASP’s improved sequentially from -4% to -3%. 


Total sports apparel sales fell 2.4% for the week as the Family Retail channel ended a 3 week run of positive trends.   This decline more than offset the improvement in the Sport Retail channel.  While the total industry experienced a slight decrease is sales for the week, ASPs grew 10% driven by dramatically higher prices in the Discount/Mass channel.  The West Coast continued to outperform the national trend for sports apparel with a positive high single digit increase. The East Coast declined in the mid to high single digits.   


Two interesting points pertaining to early Back to School can be pulled out of this week’s data: 1) price stabilization and 2) a notable sequential pick up in footwear (with a delta far greater than the build we saw last year at this time).


If you follow the table below, the last 3 week’s ASP trend has been very consistent for both footwear and apparel.  The overall trend while still slightly negative for footwear appears to be stable as we are now over one week into the key selling season.  While it is still early, this supports anecdotal evidence that the promotional environment remains unchanged at this time.  The current trend is in stark contrast to last year, where ASP’s were showing substantial increases and then decelerated sharply as back to school progressed. 


Footwear dollar sales had a very dramatic sequential delta from down high single to low double digits (which was a trend over the last 5 weeks) to +5% this week.  This uptick clearly marks the presence of BTS.  Interestingly, when we look at the back to school ramp last year we do not see anything as dramatic.  Over a similar period in 2008,  sales jumped from down -2% to +4%.  Again, it is still too early to declare a victory for the season, but the delta in sales cadence is notable as tax holidays and back to school marketing campaigns have kicked in.


Back to School, Back to Footwear? - BTS table


Back to School, Back to Footwear? - footwear and apparel dollar chart


Back to School, Back to Footwear? - ASP chart sports apparel


Back to School, Back to Footwear? - Sports Apparel channel table



PFCB seems intent on developing a new concept.  Yesterday, PFCB announced that it would provide a $10 million loan to Fox Restaurant Concepts to develop True Food Kitchen restaurants, a new Phoenix, Arizona based eatery that offers a globally inspired, seasonal menu appealing to anyone seeking a more balanced lifestyle.  Under the agreement, PFCB’s loan can be converted into a majority equity position in True Food Kitchen.


It was only about a year ago that PFCB closed on its transaction to completely exit from its Taneko Japanese Tavern concept, which it had opened only about 2 years earlier.  PFCB had only operated one Taneko restaurant, which failed to ever make money.  Additionally, until very recently, PFCB’s second concept, Pei Wei was delivering negative returns.  The company significantly slowed its Pei Wei development in FY09 and margins have grown rather significantly in each of the last three quarters.  To that end, I think PFCB would be better served to continue to focus on improving returns at its current concepts rather than invoking on new restaurant concept development. 


This True Food Kitchen agreement is much less risky in that it does not appear that PFCB will currently be involved in the day to day development and operations as it was with Taneko, which the company developed internally.  In the near term, this investment will not have a material impact on PFCB, but given that PFCB’s loan can eventually be converted into a major equity investment, the company may become more tied to the concept going forward from both an operations and financial perspective.


From a balance sheet perspective, PFCB has already cut its debt balance in half since the start of the year and still expects to generate $70-$80 million in free cash flow so this $10 million loan should not pose any problems for the company.  PFCB had said it would use its free cash flow to pay down debt and repurchase shares in FY09 so this announcement does come as somewhat of a surprise.  On its most recent 2Q09 earnings call, an investor asked whether PFCB would consider going to more of a franchise model in the U.S. with its Pei Wei concept and management responded by saying:


“I don't know that we've ever said that as much as we would evaluate any opportunities that might help us develop that brand.  You know, we are not constrained by capital, and we're not necessarily constrained by management resources.  You know, if there was a unique opportunity that presented itself, and it required a level of partnership or franchising we would consider it. You know, we probably would, but it's not high on the list of priorities right now.”


Based on this response, maybe I should not be surprised because management did say (though in reference to Pei Wei) that PFCB was open to opportunities that required some “level of partnership.”   At the same time, this comment was made less than a month ago and at that time a partnership was not a high priority.  And, given co-CEO Bert Vivian’s gloomy and overly cautious near-term outlook for the restaurant environment, it is an interesting time to get involved with a restaurant concept that is in its early-stage development phase. 

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