RRGB’s 2Q09 same-store sales came in down 11.5%, representing a dramatic sequential fall off in sales on a both a 1-year and 2-year basis.  Comparable sales growth trends deteriorated further during the first four weeks of Q3, -15.3% versus the +4.4% from the same 4-week period last year.  Management stated that the most difficult comparisons of the year are now behind them, but as we have seen in this environment, easy comparisons no longer seem to matter. 


RRGB continues to blame its sales weakness on both the macro environment and the company’s decreased level of YOY spending on national cable advertising.  RRGB should never have invested in national cable advertising because its less than 500 unit store base does not warrant such a high level of spending.  Since its inception, management was never able to quantify the advertising campaign’s returns, but based on management comments, guest count growth was directly related to the level of advertising spending in each quarter.  More importantly, it was directly related to the incremental spending on a YOY basis, which means that the company had to spend increasingly more money to continue to drive traffic higher.  This is an addictive type of spending, which does not yield the necessary returns because the incrementally higher level of spending does not typically generate incrementally higher growth.  Instead, the increased spending is needed to maintain the same level of growth.


RRGB launched its national advertising campaign in April of 2007 and ran advertisements for 11 weeks in FY07.  In 2008, the company increased this ad time to 23 weeks and its total spending to $18-$18.5 million from $11.5 million in 2007.  In 2009, RRGB does not plan to do any national cable advertising and reduced its contribution to the national advertising fund to 0.25% of restaurant sales from 1.5% in 2008.  The chart below shows the quarters when there was no advertising, increased, decreased or even advertising weeks versus the prior year (as shown by +, -,=) relative to reported traffic results.


Early on, RRGB's traffic growth benefited from this incremental spending (turning positive in 2Q07 and 3Q07) but went negative again in 4Q07 when the ads went off the air. There was some sequential improvement in 1Q08 traffic (still slightly negative) when there were incremental weeks of advertising relative to no advertising in 1Q07.  In 2Q08, advertising levels were flat with the prior year and traffic continued to decline.  Even with higher levels of advertising spending in the back half of 2008, traffic declines deteriorated further.  Of course, the macro environment had a lot to do with the top-line weakness at RRGB and outweighed the benefit of having incrementally more television ad support in 2H08.  Due to the decline in sales in 2H08, the company could not justify maintaining the same level of investment in national cable advertising in 2009.


Last year, we heard about top-line weakness despite increased spending in 2H08 so margins felt the impact of both declining sales and the incrementally higher costs.  This year, RRGB continues to point to the decreased level of advertising as the reason why sales have continued to fall off so significantly.  Most of the questions on the earnings call were focused on a national advertising campaign that does not even exist this year, which highlights the distraction it has become for the company even after the case. 





Resolution of credit issues should lead to more open disclosure of Singapore timeline.


As we wrote earlier this week, we have been hearing that LVS’s Singapore opening will be pushed back to June/July from the January/February period that Sheldon Adelson has been mentioning.   We think that, liquidity issues being resolved, a more reasonable timeframe will be outlined and investors will be notified that the property will open once it’s “ready”.  The pressure of needing extra EBITDA to comply with tight covenant hurdles will be relieved and the company will guide to a 2Q10 opening.  For a late February opening, LVS would need to open 50% of the non-gaming gross square area.  According to construction crews on the site, a February opening would require everything to go exactly right (no weather delays, no construction issues, no issues with subcontractors, etc.).



14 AUGUST 2009




Over the past few weeks we have been suggesting that the current setup for retail and apparel companies has become stale and boring. The fact is with inventories well managed, expense cuts across the board, and lower but stable levels of demand, most companies are in a good position to generate solid earnings results. This is clearly consensus thinking as we head into the back half of the year. As this backdrop has evolved over the past several months, one may have thought Street expectations would rise along the way leaving less room for upside surprise. However, in looking at the data for 30 apparel/footwear manufacturers and retailers which recently reported 2Q09 results, we are surprised to find the level of earnings upside is expanding both in magnitude and breadth.


We realize it is still early in the earnings season for retailers, but the data is compelling and suggests there is likely more upside (even if we all see it coming). Of the 30 companies we tracked, 27 have exceeded consensus estimates in 2Q. This compares with only 21 out of 30 exceeding expectations in 1Q. Most surprising is the average magnitude of the upside. Currently, operating earnings are exceeding the consensus by an average of 41%! This is a sharp acceleration following 1Q results where the same group of companies exceeded estimates by 12%. In 4Q08, the same group missed expectations by 5%.


Now, clearly the environment has changed over the past six months, allowing earnings revisions to move higher. However, perception may not be the reality of what is really occurring. The Street is still underestimating the impact of the “boring” dynamics. If we all knew inventories were low, expenses were controlled, and gross margins were likely to be up year over, then how can the Street be so far off from the actual results? The bottom line is, a high degree of skepticism still remains on the consumer and the sector. It might be stale and boring, but this is just another confirmation why we don’t want to be short these names just because “everyone knows” easy comparisons are on the horizon.  The Quality Trade will ultimately separate those that have been prudently investing in profitable growth (RL, BBBY, UA, and NKE) but for now the tailwind is still blowing across the majority of the industry.


- Eric Levine




Some Notable Call Outs


  • Nordstrom is opportunistically taking advantage of the real estate environment and value conscious consumer with a slightly more aggressive store growth plan for its Rack concept. There are now plans to open 13 stores this year vs. a prior plan for 10. There is also a plan for 12 units in 2010, with a few additional locations to be added soon. Management noted that closures from Linens N’ Things and Circuit City have provided opportunities for new Rack locations.


  • URBN’s management team made it clear the company has not sacrificed any investment in the company’s growth initiatives over the past year. After pointing out there have been no layoffs at the company despite the challenging environment, the CEO highlighted ongoing investments which include: a joint venture with an Asian buying agent, enhanced functionality of the ecommerce platform, a new mobile site, investments in social media marketing, a 50% capacity increase in the East Coast distribution center, and development of European infrastructure to support aggressive growth in the near future. The company announced that it expects there could 100+ stores in Europe between the two main brands.


  • On the surface it appears that KSS’ store growth of 20-25 stores for next year seems very conservative given the company’s aggressive push to open 59 stores this year, including the strategic acquisition of former Mervyn’s location in CA and the Southwest. However, when pressed on the topic management explained that it sees many opportunities materializing over the next 12-18 months and the company will be aggressive in using its balance sheet to pursue market share opportunities through displaced real estate.


  • Further confirmation of sourcing benefits was provided by Kohl’s. The company expects a 5-6% improvement in product acquisition costs over the back half of this year and into early next year.


  • This is just a fact, but one that can’t be ignored. Wal-Mart now serves 200 million customers per week across the globe. On average, that’s 3.3% of the world’s population.




-After almost a year of doom and gloom, footwear firms are trying to accentuate the positive in their back-to-school marketing - In one of JCPenney’s latest “Schooled in Style” commercials, teens stage a riotous underground fashion show in the school cafeteria, set to the music of new wave band Hockey. The tone is light, positive and fun, which is not so much new for JCPenney, but is a welcome change after months of highly promotional TV ads touting dollar menus and BOGO sales. Famous Footwear, which in the past has been known for its buy-one-get-one specials, is also playing up a new message: “Make Today Famous.” The upbeat tagline, introduced to consumers this summer, is being supported by a multichannel campaign, including TV and radio ads, promotions on Facebook and Twitter, and a humorous digital short that went live last week on  The short, featuring a mob of women and kids chasing a shoe truck (think heels instead of ice cream), tries to transcend the everyday buying experience and remind customers about the joys of shopping. <>


-Reebok and Foot Locker team up with rapper Fabolous on Classic Remix -The Canton, Mass.-based Reebok (a division of Herzogenaurach, Germany-based Adidas) announced yesterday that rapper Fabolous would be the latest artist to participate in the Classic Remix concert series in conjunction with New York-based athletic chain Foot Locker. The Classic Remix footwear collection for Fabolous will consist of heritage styles including the SL 7010, Workout Hi, Tejara and Classic Leather in various colorways for men, which will retail between $60 and $75 and will be available in select doors in states that will host concerts. The first 100 fans who purchase one of the styles at the rapper’s personal appearances will win a pair of tickets to an intimate performance. The shows will be held in New York on Aug. 24; New Orleans on Aug. 26; Miami on Aug. 28; Houston on Sept. 1 and Atlanta on Sept. 3. Details on the location and times of the appearances can be found at <>


-As part of its plan to open as many as 1,000 stores in China before 2012, New Balance will unveil its first Experience Store in Beijing on Saturday - Designed to showcase the brand’s 103-year-old heritage, the 2,000-square-foot store’s first-floor decor features a worn-in leather couch, framed vintage logos, ads and other paraphernalia dating from the early 20th century. A ribbon extending from the main entrance upstairs to the decidedly more modern second-floor highlights the brand’s milestones. Audio, visual and olfactory touches such as the oak scent of a mid-20th century shoe store are used in different areas throughout. The store carries both New Balance footwear and the entire apparel collection. <>


-Li & Fung to Use $1 Billion `War Chest' for Growth As Opportunities Rise - Li & Fung Ltd., the biggest supplier of clothes and toys to Wal-Mart Stores Inc. and Target Corp., said it can spend about $1 billion on acquisitions to boost growth because the “murky” U.S. economy is prompting some company owners to sell.  <>


-Retailer Talbots Inc. said Thursday that it signed a deal making Li & Fung Ltd. its exclusive global apparel sourcing agent - Terms were not disclosed. Starting next month, Hong Kong-based Li & Fung will be the exclusive agent for almost all of Talbots' apparel and will serve as the non-exclusive agent for its swimwear, intimate apparel, footwear, jewelry, handbags and accessories. Talbots President and CEO Trudy Sullivan said in a statement that the agreement should help the company lower its costs of goods sold and internal operating expenses even more and make its time to market faster. <>


-LVMH expands spirits portfolio with stakes in two French private winemakers - LVMH Moët Hennessy Louis Vuitton, the world’s largest luxury products group, has boosted its portfolio of premium wines with the acquisition of stakes in two French private winemakers. LVMH has acquired 50 percent of  Cheval Blanc, which produces and commercializes Chateau Cheval Blanc, and 50 percent of La Tour du Pin, owner of the Chateau Quinault l'Enclos estate. No financial details were disclosed for the two transactions, which were carried out with unit of Groupe Arnault, the holding company of LVMH's chief executive Bernard Arnault. <>


-Switzerland's Swatch Group reported a 28% slump in first-half net profit but forecast a pick-up in demand for the second half of 2009 - The company said Friday that current sales and order levels show signs of recovery. The world's largest watchmaker, best known for its colorful Swatch watches, said sales in the second half of 2009 should be in line with the same period in 2008, with some key brands expected to post higher sales.  Exports of Swiss timepieces have been tumbling over the past year, as consumers have drastically cut spending on luxury watches and retailers have sharply reduced inventories. However, Swatch has benefited from its diversification in all price and market brackets as low and mid-range price points have held better in the current economic downturn. The company said the sales development in the last two to three months as well as current order entries show signs of recovery. "This positive trend has been clearly confirmed in July 2009," Swatch said in a statement. <>


-High Tech Swim Suits Banned from High School Competition - The National Federation of State High School Associations (NFHS) has announced that high-tech swimsuits that have been linked to record performances at all levels of competition the past couple of years have been banned for high school competition, effective immediately. <>


-Consumers are continuing to purchase private label products at an increasing rate, per new research from Nielsen -  The “U.S. Store Brand Development” study found that both private label dollar and unit sales significantly increased for the 52-week period ending July 11, 2009 versus the prior year. Dollar sales grew by 7.4% to $85.9 billion within food, drug and mass-merchandisers (including Walmart), with shares recorded at 16.9%. This reflects an increase of 0.7 points from the previous year. Growth peaked in 2008 but then slowed slightly in 2009 with falling commodity prices and increased retail discounting. <>


-A student with a prosthetic arm has won her case for wrongful dismissal by clothing retailer Abercrombie & Fitch - An employment tribunal found she was wrongfully dismissed and a victim of disability discrimination. It said the US firm's flagship UK store, in Mayfair, Central London, which has been criticised for recruiting only young and beautiful assistants had violated her dignity. The student was born with her left forearm missing and was initially allowed to wear a cardigan to work on the shop floor to cover up her fake arm. The 22-year-old was then told she'd have to work in the back of the store away from customers because her cardigan went against Abercrombie & Fitch's dress code. The Student, Riam Dean, was awarded £7,800 for injury to her feelings, £1,077.37 for loss of earnings and £137.75 for wrongful dismissal. <>


-It has been a while since shoppers minded what Gap was selling - The Gap division of Gap Inc. was struggling even before the recession, which has persuaded consumers to cut back significantly on clothing purchases. Problems with the appeal of its merchandise, which was perceived as unfashionable, have vexed Gap at a time when its friendly prices and back-to-basics approach should be attracting customers. In a major effort to address that, Gap is reintroducing its core product, denim jeans, with an elaborate campaign notable for its many nontraditional elements, which include a Facebook page, video clips, a realistic online fashion show on a virtual catwalk and an application for the iPhone called the StyleMixer.  The campaign, which gets under way on Thursday, promotes the newly named 1969 Premium Jeans line with the theme “Born to fit.” The year in the name is a tip of the hat to the 40th anniversary of Gap, which opened in 1969 selling Levi’s jeans and records. The 1969 Premium line represents a reworking of the types of jeans Gap sells, to improve their fit and finish, along with the addition of popular styles like the boyfriend jean for women and the skinny jean for men. Prices start at $59.50, which Gap hopes will appeal to budget-conscious shoppers trading down from designer jeans costing $100 to $300 a pair. <>



RESEARCH EDGE PORTFOLIO: (Comments by Keith McCullough):  PETM, KR


08/13/2009 10:11 AM


I think a lot more people are short this stock now than prior to JPM's super secret "one on one" meeting... I'll take the other side of that into the print. KM


08/13/2009 10:37 AM


A lot of people are still hiding in this "the grocers are cheap" safety trade. Low beta is really starting to have issues. KM

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Macau’s hotel occupancy rate was 60.7% in June, the second lowest since the 2003 Sars outbreak.  The rate was down 12.6% from the same period in 2008.  Analysts are blaming swine flu, along with 300 new rooms being added when City of Dreams opened in June, as well as the lingering economic downturn. 

There was also a sharp drop in package tours from the mainland.  The central government began cracking down on low-fare tours involving compulsory shopping.  The new regulation forbids travel agencies from operating tours below costs.  Package tour visitors dropped by 46.1% in June compared to the same period in ’08. 






LVS announced that it had struck a deal with its Venetian Macau Limited creditors, allowing it to raise more cash and giving them additional room to navigate under its leverage ratio covenants by raising the maximum permitted covenant.   Many analysts are now convinced that a filing of a Hong Kong IPO is now imminent (within two weeks).  The shares jumped sharply yesterday; and are up 50% in the last month alone.

From the creditors’ perspective, VML is now in the clear to file for the IPO and/or raise new debt in Macau.  The amendment includes six quarters of relief from its loan covenants and allows it to sell a minority interest in its Macau operations.  The interest rate for the loans under the credit facility has now increased to Libor plus 5.5%.  If LVS sells the stake in its Macau operations and prepays US$500 million of outstanding loans, the rate would drop 100 bps to L + 4.5%.



LVS is a company where senior executives working in Asia generally only last a few years.  The latest casualty, Len de Angelo, senior vice-president for operations in the region, is the latest to move on.   For him to leave at a time so close to the opening of the Marina Bay Sands, which is the world’s most expensive integrated resort, indicates that something obviously went awry.   Two new people have been appointed to run the Marina Bay Sands in Singapore: Thomas Arasi will be president, and Ronen Nissenbaum will be executive vice-president for operations.  Both men have extensive hospitality experience, but neither has any gaming experience…



MPEL’s recent announcement of its effort to raise US$200 million through an American depository shares offering will, according to Lawrence Ho, “better position us to be able to pursue future development opportunities while at the same time maintaining our rigorous approach to balance sheet prudence.”

Ho is restricted in terms of what he can do with the liquidity available on his US$1.75 billion senior secured facility. He has to use it on construction of what he told the bankers he was going to construct.  Raising some more cash to deleverage, or even just change the loan terms, gives him more flexibility to realize the first part of his statement. 

DM believes that the major point to be taken from this story is that Macau is “starting to heat up again”, and that anyone who doesn’t have the flexibility to do something or buy something would be foolish not to avail of an opportunity to gain that flexibility. 



Macau business published an online report alleging that Galaxy Entertainment Group has postponed the opening of its Cotai resort until December 23, 2011.  The 2,200 room “Mystical Oasis”, which is likely to undergo a branding change before then, is scheduled to have its exterior finished by the end of this year.  The interior should not, theoretically, take more than 18 months so there should be ample time to finish the project by the end of 2011.

The group is clear in its intention to observe the demand in Cotai rather than pursue a “build and hope” strategy.  DM asks if the Lui family will end up ruing the window of opportunity afforded by the delay on Lots 5&6 to capture market share if Macau turns hot again, as it appears to be doing now. 



Although the summer got off to somewhat of a slow start, it seems likely that a record number for the month is on the cards, certainly more than US$10 billion.  More importantly for the Big Six, the mass floors have gained new life and the hotels are filling up.  This weekend, COD and the Venetian are sold out.

The Journey

“A cold coming we had of it, just the worst time of the year for a journey, and such a long journey.”
-T.S. Eliot
When T.S. Eliot wrote his poem, “Journey of the Magi”, he was not referring to either the stock market, or stock market operators, but rather his own personal journey towards Christianity.  Now with Keith on his way to Montauk this morning, it doesn’t mean things stop back here in the office in New Haven.  Just like usual, the team is in early, feet on the floor, and wearing our global macro pants interpreting the facts as they stream in from our contacts around the globe.
Now my ability to interpret poetry is limited at best (I’m a knucklehead hockey player after all), but what I do know is that we stock market operators have a journey ahead of us as well.  The journey is called September, which is historically the worst month for stock market performance.  We had a potential subscriber who interpreted this journey very effectively yesterday when he wrote to us and asked:
“I am a monkey waiting for a pullback before I put on more aggressive trades (seasonal issues, plus market has moved a bunch). Recently, bad news is good news and good news is good news, and this seems a bit irrational. We have decided to slowly add to a more aggressive position between now and end of September. We are trying to avoid going long and then have the market pull a big reversal. We are long only and do not actively trade the portfolio, but we are small enough to be a bit opportunistic. Do you have thoughts on approaching the market this way? As an fyi, we are not paying clients yet but are actively looking into a subscription.”
While we have been circulating our Early Look on a complimentary basis, we, of course, don’t dispense advice for free.  While free is cool, it is not a very lucrative business model. That being said, debating hypothetic views is not a process, so we will post our advice very directly.  It is August 14th, two weeks before the supposed worst month in stock market performance begins, and this is where we stand:

  • We have 27 long positions in our virtual portfolio and 8 short positions, for a more than 3 : 1 ratio of longs to shorts; and
  • In our asset allocation model, we are at virtually the highest invested position we have ever been in. As stock market operators, we can debate the hypothetical performance of September based on its historical performance.  Or we can play the game in front of us, and take a risk adjusted shot.  The game in front of us is not telling us to wait 7 weeks until September is in the rear view mirror, but rather it is telling us to take the shot, right here and now.

I’m not going to pretend I’m Keith this morning, but I will tell you what I see from my seat, which is consistent with his view.  First, volatility continues to make new lows and while it is not on its lows of the year, the CBOE volatility index is at 24.71, and that’s positive.  Second, 1-month LIBOR is at 0.27%, which means that monies, on a short term basis, globally continue to be almost free.  Finally, the U.S. government has made very clear their intention is to debase the currency, which is positive for the price of stock markets and commodities.
On the last point we held an in depth call on oil earlier this week, “Is Peak Oil Peaking?”  (If you’d like to see the slides or a replay of the call, let us know.)  For those non-subscribers who didn’t get a chance to dial in, I’ll cut to the chase on that call as well.  Oil is up 54% and we are still bullish on oil.  In fact in our virtual portfolio, we are long of the USO (the United States Oil Fund) and long of EWC (Canadian etf).
So, why are we continuing to take the shot on oil, despite the fact that it is up 54% YTD and the said “experts” don’t see much upside from here (consensus mean estimate for Oil in Q3 2010 for 34 analysts according to Bloomberg is $74.10, or less than 6% upside from here.)  To begin with oil over the last year has a -0.89 r-squared to the US Dollar, so dollar down equals oil up.  Also, and while we aren’t peak oil theorists, global supply continues to be constrained and the fall off in drilling this year by over -30% y-o-y is only going to exacerbate that fact.  The funny thing with a declining asset (the world’s oil supply declines between 5 – 8% every year naturally), is that you need to produce more of it to sustain supply levels.
Along with being a fabulously talented poet, T.S. Eliot was also an adroit observer of human nature and his peers.  He once noted, “Immature poets imitate; mature poets steal.”  The same thing could be said for stock market operators.  While we aren’t going to encourage our clients to steal, when the monies are free, don’t debate the semantics. The three Piggies are getting paid (bankers, debtors and politicians), so make sure you and your clients are getting paid as well.
Enjoy the journey,
Daryl G. Jones
Managing Director

XLK – SPDR Technology Tech and Healthcare remain the two sectors most primed for accelerating M&A activity in Q4. Both look great from an intermediate term TREND perspective, but at a price.

EWC – iShares Canada We bought Canada on 8/11 ahead of Bernanke’s pandering. Canada has what THE client (China) needs, namely commodities, which we believe will reflate as the buck burns.   

USO – Oil FundWe bought USO on 8/10. With Bernanke as the catalyst for the USD breaking down we want to be long oil.

QQQQ – PowerShares NASDAQ 100 We bought Qs on 8/10 to be long the US market. The index includes companies with better balance sheets that don’t need as much financial leverage.

COW – iPath Livestock This ETN tracks an index comprised of two thirds Live Cattle futures, one third Lean Hogs futures. We initially began looking at these commodities because of recession inspired capacity reductions combined with seasonal inflections. A series of macro factors including the swine flu scare, a major dairy cattle cull in response to collapsing milk prices and the collapse of the Argentine agricultural complex due to misguided policy provided us with additional supporting fundamental data points for the quantitative set up in price action.  

EWG – iShares Germany Chancellor Merkel has shown leadership in the economic downturn, from a measured stimulus package and budget balance to timely incentives such as the auto rebate program. We believe that Germany’s powerful manufacturing capacity remains a primary structural advantage; factory orders and production as well as business and consumer confidence have seen a steady rise over the last months, while internal demand appears to be improving with the low CPI/interest rate environment bolstering consumer spending. We expect slow but steady economic improvement for Europe’s largest economy, which posted a positive Q2 GDP number.

XLV– SPDR Healthcare Healthcare has lagged the market as investors chase beta.  With consumer confidence down and the reform dialogue turning negative we like the re-entry point here.

CAF – Morgan Stanley China Fund A closed-end fund providing exposure to the Shanghai A share market, we use CAF tactically to ride the wave of returning confidence among domestic Chinese investors fed by the stimulus package.  To date the Chinese have shown leadership and a proactive response to the global recession, and now their number one priority is to offset contracting external demand with domestic growth.

CYB – WisdomTree Dreyfus Chinese Yuan The Yuan is a managed floating currency that trades inside a 0.5% band around the official PBOC mark versus a FX basket. Not quite pegged, not truly floating; the speculative interest in the Yuan/USD forward market has increased dramatically in recent years. We trade the ETN CYB to take exposure to this managed currency in a managed economy hoping to manage our risk as the stimulus led recovery in China dominates global trade.

TIP– iShares TIPS The iShares etf, TIP, which is 90% invested in the inflation protected sector of the US Treasury Market currently offers a compelling yield. We believe that future inflation expectations are currently mispriced and that TIPS are a efficient way to own yield on an inflation protected basis, especially in the context of our re-flation thesis.

GLD – SPDR Gold - Buying back the GLD that we sold higher earlier in June on 6/30. In an equity market that is losing its bullish momentum, we expect the masses to rotate back to Gold.  We also think the glittery metal will benefit in the intermediate term as inflation concerns accelerate into Q4.

VXX – iPath VIXAs the market rolled over and volatility spiked, we shorted the VXX on 8/13.

UUP – U.S. Dollar Index We believe that the US Dollar is a leading indicator for the US stock market. In the immediate term, what is bad for the US Dollar should be good for the stock market. Longer term, the burgeoning U.S. government debt balance will be negative for the US dollar.

DIA  – Diamonds Trust- We shorted the financial geared Dow on 7/10 and 8/3.

EWJ – iShares Japan –We’re short the Japanese equity market via EWJ on 5/20. We view Japan as something of a Ponzi Economy -with a population maintaining very high savings rate whose nest eggs allow the government to borrow at ultra low interest levels in order to execute stimulus programs designed to encourage people to save less. This cycle of internal public debt accumulation (now hovering at close to 200% of GDP) is anchored to a vicious demographic curve that leaves the Japanese economy in the long-term position of a man treading water with a bowling ball in his hands.

SHY – iShares 1-3 Year Treasury Bonds – If you pull up a three year chart of 2-Year Treasuries you'll see the massive macro Trend of interest rates starting to move in the opposite direction. We call this chart the "Queen Mary" and its new-found positive slope means that America's cost of capital will start to go up, implying that access to capital will tighten. Yields are going to continue to make higher-highs and higher lows until consensus gets realistic.


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. 

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