Sands China, the Macau-based subsidiary of Las Vegas Sands, announced yesterday that it would issue U.S.-denominated unsecured notes (at an interest rate yet to be determined), in order to redeem $1.8 billion in senior notes, plus interest, that come due in 2023. Sands China proposes to list the new notes on the Hong Kong bourse, with the caveat that as “no binding agreement in relation to the proposed offering of notes has been entered into at the date of this press release, the proposed offering of notes may or may not materialize.”
The news came the same day that Las Vegas Sands announced subpar financial results from its Macau casinos. Its July revenues of $265 million declined to $148 million in August. They also swung from cash flow-positive ($44 million in July) to minus $14 million last month, meaning that Sands’ manifold Macau properties were generating a negative return on investment.
In an investor note, JP Morgan analyst Joseph Greff wrote, “These results shouldn’t come as a surprise to the most recent of our/investor expectations, which have been eroding, given tighter border restrictions that were implemented in Macau throughout the summer, impairing visitation there. Recall travel restrictions started to tighten in late July and really picked up in August.”
He added, “Admittedly, it’s tough to be near-term bullish on the Macau sub-sector with an expectation of an immediate positive travel mobility catalyst. But those investors who are patient should like the laggard profile. … The key issue for both Macau (and Singapore) is travel mobility, which is going to be directly tied to infection and vaccination rates and ensuing travel policies changes, all of which are tough to predict.”
Fitch Ratings placed a BBB- or “Outlook Negative” rating on the new note offering. It was motivated in part by the gloomy economic forecast for Macau, where gaming revenues are projected to be 65 percent lower than 2019 levels, not regaining their former altitude until as far out as 2024.
“Fitch assumes a slightly faster trajectory for Singapore [home to Marina Bay Sands], which has a high vaccination rate, benefits from strong domestic demand, and is starting to open up quarantine-free travel with certain high-vaccinated countries.”
Fitch’s outlook was tempered by actions taken by Sands to bolster its credit rating and improve liquidity. These include holding off on dividends and extending its timeline for a $3.3 billion expansion of Marina Bay Sands to 2023. However, Fitch cited “uncertainty” about how Sands would use the $6.25 billion realized from its sale of The Venetian, Palazzo, and Venetian Expo Center in Las Vegas. The ratings service estimated Sands’ total leverage as being between two and three times equity, provided that “shareholder returns do not resume until 2023 and their payout relative to cash flow is consistent with pre-pandemic levels.”
The analysts wrote that gross leverage is improving, thanks to Sands’ cash flow and a faster-than-expected recovery in the company’s operating margins, particularly given its high labor costs. Sands, they penned, “is sitting on considerable excess liquidity to ensure balance-sheet strength, as its gaming markets slowly recover with an increase in international travel.”
Fitch analysts saw other signs of hope. “Following the Las Vegas asset sale, the parent will have no unencumbered property cash flows, but benefits from a meaningful royalty stream from the two distinct subsidiaries and high residual equity value. The linkage is strong because of the strategic importance of the subsidiaries, which share brands and customers, to the parent.”
They applauded Sands’ “historically strong financial profile and commitment to a conservative financial policy.” This manifested, according to Fitch, in prudence during the ongoing pandemic that included the deferral of dividends until such time as cash flow stabilized, plenty of discretionary free cash flow, and “high-quality assets in attractive regulatory regimes.” No share repurchases are anticipated.
