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.