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LVS: CREDIT OPTIONS AND OUTCOMES

It is almost a mathematical certainty that LVS will breach a covenant on its US facility in Q2/Q3 unless some drastic measures are taken. Asset sales, credit facility amendments, or even a US bankruptcy filing are potential remedies. These scenarios are discussed below.

First some background on LVS’ $5BN US facility, here’s some background. The US facility’s maximum consolidated leverage ratio is currently 7.5x, stepping down to 7.0x for the period ended March 31, 2009 and then continuing to step down 0.5x every six months to 5.0x for the period ended March 31, 2011. At the end of the 4Q08, consolidated leverage stood at 6.2x. The calculation of consolidated leverage allows for $100MM of “equity contributions,” and an addback of roughly $16MM of interest on the $250MM Senior Notes to the TTM EBITDA calculation. The TTM EBITDA calculation also allows for pro-forma treatment to new openings (like Bethlehem). The consolidated debt is calculated net of unrestricted cash over $75MM at LVSC and its Guarantors.

According to our calculation, LVS will breach its maximum leverage covenant on the US facility in either the 2Q or 3Q09. LVS has the ability to move cash around or procure a cash infusion to cure a small breach at the US level, so they may be able to make it past 3Q09. However, the size of the breach amount widens considerably in 2010 as the leverage covenant continues to step down.

Conceivably if LVS could sell some non-core assets this would also go a long way to alleviating a technical default scenario. Unfortunately, they have already sold the Palazzo retail, but will likely only get an unsecured claim in GGP’s likely bankruptcy when payment comes due in 2010. Another asset LVS would probably love to sell is the St Regis residence tower, which is a much tougher proposition, but currently that asset produces no cash flow, so any price LVS can get would be de-leveraging. We believe that LVS would happily sell it at cost if it could (roughly $600MM). However, the sale of the St Regis Tower alone would probably not be enough to avoid breaching the covenant.

Given the licensing hurdles and mark to market that banks would need to take, many gaming operators that stumble into technical default are able to get amendments at a price. We believe that the banks would want at least an additional 200-400bps ($100-$200MM) in interest spread in return for leverage covenant relief. The actual increase in spread would depend on what else they offered the banks. The US facility is secured by the two Las Vegas assets’ “Guarantor”. If LVS offers up Sands Bethlehem as collateral, and perhaps a stock pledge of the public entity, this would help in lowering the additional spread that they would need to pay to secure an amendment.

However, coupling the licensing issues with the fact that LVS is levered approximately 12.5x through the bank debt, which is trading in the 50 cent range, and that there is no residual equity value at the Guarantor level, we don’t think that the banks have a lot of leverage to extract any material amendment fee. In fact, we believe that the most likely scenario is that the banks just charge LVS a modest amendment fee and allow LVS to continue making interest payments.

The banks’ only other alternatives are to either take over the collateral, or throw LVS into bankruptcy. Unlike distressed buyers of debt, the banks probably own the bank debt at par, and hence they would own the assets at 12.5x EBITDA. They would also have to hire a licensed operator and spend a large chunk on restructuring advisors and attorneys. If the banks attempt to seize the assets, then LVS would likely file for bankruptcy protection. The end result would likely be some sort of pre-pack where some of the bank debt would get equatized. There’s no real reason for banks to force LVS down this path when they can just sit and collect their interest payments and avoid the mark down of their loans.

Even in the unlikely scenario that LVS does end up filing the US Subsidiary for bankruptcy protection, this doesn’t render the stock of LVS worthless. In the event this scenario plays out, as we already mentioned, some of the debt will likely get “equatized” and the current shareholders of LVS will get diluted. In a perverse way though, this may actually boost the value of the stock.

At the current stock price, investors are clearly pricing in a high probability that the company is worth zero and herein lies the issue. We agree that the US entity is worth zero, but that doesn’t render the Macau and Singapore subsidiaries worthless. A filing at the US entity doesn’t trigger a default at the Macau or Singapore facilities. Macau may be worth around $6.00 (if the covenant situation there is overcome) and Singapore around $4. Even if the US entity files, and equatizes $1-2BN of debt, there is still value in the remaining two entities, and now the probability of zero is largely eliminated.


EYE ON THE CONSUMER - HOUSING

I can almost guarantee you that nobody is making this call today. I believe that the worst of the housing crisis is behind us. Economic bottoms are processes, not points. Keith McCullough and I said in early January that housing could bottom (in terms of sequential price declines and inventory growth) in Q2 of 2009, and apparently Ben Bernanke agrees. Earlier today Mr. Bernanke suggested that “there is a reasonable prospect that the current recession will end in 2009 and that 2010 will be a year of recovery." The timing of Bernanke’s 2009 bottoming process is in line with ours.

It was reported that the S&P/Case-Shiller 20-city index fell 18.5% year-over-year, the biggest drop since the study began. Every headline you read about today’s data will focus on the year-over-year numbers. Yes, it was the worst month on record, but the rate of deceleration continues to slow. The quarterly sequential change in year-over-year home price declines slowed to -1.5% in 4Q08 versus -5% in 1Q08. On the margin, this is a positive. As we noted early this year, we believe that as we reach the spring, we will have reached the peak in declining home prices. Home prices will continue to decline but at a much lesser rate.

The market is looking for leadership that can get us out of the downward spiral we are in. Many have relied on leadership coming from Washington to lead us to better times. It now appears that partisan politics will not let a leader emerge from the rubble in Washington. Therefore, we need to look elsewhere for something that will give consumers increased confidence that the worst is over. The political debate over the solvency of the nation’s leading financial institutions is not instilling confidence that there is a clear direction on how to fix the system, which is causing the market to set new lows. So can real estate be the asset that brings us out of the decline?

The bubble in residential real estate is the root cause for the problems we face today. Therefore it is only fitting that residential real estate should become the leading indicator that the worst of times is over; or at the very least, that the bottom is near. Increased confidence in the real estate asset class will allow the assets to obtain higher prices and ultimately, a higher valuation.

The bears point to the fact that home values will continue to decline contributing to what’s already been the biggest destruction of American household wealth in many generations. Consequently, the decline in home prices makes banks even more reluctant to offer mortgages. Yes, that is true, but there is a significant amount of money being thrown at the issue, helping to form the bottom.


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Is US Housing Bottoming?

I can almost guarantee you that nobody is making this call today. I believe that the worst of the housing crisis is behind us. Economic bottoms are processes, not points. Keith McCullough and I said in early January that housing could bottom (in terms of sequential price declines and inventory growth) in Q2 of 2009, and apparently Ben Bernanke agrees. Earlier today Mr. Bernanke suggested that “there is a reasonable prospect that the current recession will end in 2009 and that 2010 will be a year of recovery." The timing of Bernanke’s 2009 bottoming process is in line with ours.

It was reported that the S&P/Case-Shiller 20-city index fell 18.5% year-over-year, the biggest drop since the study began. Every headline you read about today’s data will focus on the year-over-year numbers. Yes, it was the worst month on record, but the rate of deceleration continues to slow. The quarterly sequential change in year-over-year home price declines slowed to -1.5% in 4Q08 versus -5% in 1Q08. On the margin, this is a positive. As we noted early this year, we believe that as we reach the spring, we will have reached the peak in declining home prices. Home prices will continue to decline but at a much lesser rate.

The market is looking for leadership that can get us out of the downward spiral we are in. Many have relied on leadership coming from Washington to lead us to better times. It now appears that partisan politics will not let a leader emerge from the rubble in Washington. Therefore, we need to look elsewhere for something that will give consumers increased confidence that the worst is over. The political debate over the solvency of the nation’s leading financial institutions is not instilling confidence that there is a clear direction on how to fix the system, which is causing the market to set new lows. So can real estate be the asset that brings us out of the decline?

The bubble in residential real estate is the root cause for the problems we face today. Therefore it is only fitting that residential real estate should become the leading indicator that the worst of times is over; or at the very least, that the bottom is near. Increased confidence in the real estate asset class will allow the assets to obtain higher prices and ultimately, a higher valuation.

The bears point to the fact that home values will continue to decline contributing to what’s already been the biggest destruction of American household wealth in many generations. Consequently, the decline in home prices makes banks even more reluctant to offer mortgages. Yes, that is true, but there is a significant amount of money being thrown at the issue, helping to form the bottom.

Devalue the Dollar:

Stocks, House Prices, and This Chart Will Stop Going Down!

HBI: Quote from a Winner

“Had I known that the recession was coming months ago I would not have changed any one of our strategies that are currently in place.” Closing quote from Rich Noll, CEO.
“Had I known that the recession was coming months ago I would not have changed any one of our strategies that are currently in place.” Closing quote from Rich Noll, CEO.

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