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ASCA: REFI AND EAST CHICAGO UPDATE

Unlike most of the sell side, I’ve recently focused on the balance sheets of gamers. ASCA has been of particular interest given the proximity to tripping the senior leverage restriction in its credit facility. As I pointed out in the post “ASCA: TOEING THE COVENANT LINE” on 8/14/08, unless the company refinances some of its debt, it is likely to bust a covenant by Q2 2009 if not sooner. ASCA has pulled a few levers as of late to ensure it doesn’t, including cutting costs and maintenance capex. Management knows this is not a sustainable strategy. Its customers are accustomed to a high level of quality and service which will quickly deteriorate under the current low level of spending.

For the aforementioned reasons, look for ASCA to refinance sooner rather than later despite the current credit environment. The least painless approach is to float a subordinated bond indenture. My best guess is an offering of $200 to $250 million at 12%. The rate would be consistent with where Boyd Gaming’s sub debt trades. As shown in the following chart, this scenario results in an EPS hit of $0.10 to $0.20 or roughly 12-25% of my forward 12 month earnings estimate. It could be worse. EPS would be cut in half with a full refinancing of the credit facility or a covenant waiver. A subordinated debt offering buys the company some time. The current, attractive facility does mature in 2010, so the company has a maximum of 2 years left of over earning.

Another topic of interest for ASCA investors is the performance of Ameristar East Chicago following the opening of the new Horseshoe Hammond. It’s only been two weeks but Ameristar may be holding up a bit better than the company expected. We continue to believe property revenues will fall between 5 and 10% at East Chicago and the first two weeks are probably in that range. Stay tuned for more updates.


Sub debt financing will drive EPS lower

LVS: BOFA DOWNGRADE MAY PROVIDE SHORT COVERING OPPORTUNITY

LVS is down 29% in the past week including 6 straight daily declines. I’m no fan of the Macau stocks but the Bank of America downgrade may provide a near-term short covering opportunity. The stock appears oversold if it goes below $39 per Keith McCullough’s quantitative model. Moreover, we may get a fundamental positive catalyst as soon as next week. My Macau guys think LVS is close to finalizing a credit facility to finance some of its Macau development. An agreement here could provide a little support for the stock considering investor concerns around financing.

I still think the trend is lower on the Macau stocks.


Lehman (LEH): Is Korea The Answer To The Transparency Problem?

So now Singapore is going to own Merrill Lynch and Korea is going to own Lehman Brothers. Hmmm... Sounds like we are definitely on the right track to solve the transparency problem in the US Financial system, doesn’t it!

If you think that selling our said trophy Wall Street investment banks to governments who don't disclose anything is a good thing, run out and buy yourself some US Financials today.

This looks like a game of ‘Monopoly’ where we are parceling off Wall Street due to foreclosure.
KM

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Thanks Ben

Bernanke's boilerplate statement on the US Economy this morning out of Jackson Hole doesn't have any proactive or predictable value for the US market. The slight change in his wording was that he expects "medium term” inflation to abate somewhat, but guess what, he has been predicting a slowdown in inflation since 2006!

Obviously Ben's “call” on inflation has been one of the worst macro calls in recent memory. That said, eventually even a broken clock gets the time right. Surely using his new "medium term” definition gives him room to call inflation abating before the year 2010, but who cares.

Bernanke's crystal ball has had zero predictive value. I am not sure why the media and traders think it does today, other than they have no context.
KM

Taiwan joins Singapore, Japan, etc in the Asian Slowdown camp

Asian growth slowed materially in Q2 of 2008. That will be a historical perspective that most investors look back on when this year is all said and done. Unfortunately, a large % of them didn't see it coming ahead of time.

The Harvard Endowment, for one, went on an ETF buying binge, and loaded up on Taiwan too early (the ETF for Taiwan is EWT). This morning the Taiwan government reported Q2 GDP slowing to +4.3%. That's down sharply versus prior expectations and down from +6.3% since Q1 of 2008. It is global this time, indeed.
  • The TAIEX Index has dropped -26% since May 19th, 2008 to 6,911.
    KM
chart courtesy of stockcharts.com

FL/HIBB: Knockout Combo

I still like FL here, and am increasingly concerned about SKX and others levered to non-performance, as reiterated yesterday.

While HIBB posted solid comps (+5%), FL was nothing to write home about – about in line at -0.5%. But with sales up 1.5% in total, we saw inventory down 3.5%. The key was that gross margins came in +419bps vs. last year. As a frame of reference, my quarterly model goes back to the late 1990s, and I cannot find a single quarter that comes close to +419bps in order of magnitude. What I like is that the strength I’m seeing now is entirely from managing the balance sheet, and any business strength (which I think will come) will be leg 2 of this call.

I hate to sound like a broken record, but I see no reason why FL cannot, and will not, revert to a mid-single digit EBIT margin over 2-3 years.
So rare for FL to look so good on this sales/inventory/GM chart (let me know if you need help interpreting).

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