Monday, November 10, 2008

Las Vegas Sands (NYSE:LVS): Tug of War

There will be a tug of war today in Las Vegas Sands (NYSE:LVS) as two pieces of news are out:

- Merrill Lynch is downgrading the stock to Underperform from Neutral while lowering their tgt to $7 from $15. LVS needs to raise capital to cure US covenants, which it expects to violate in 4Q, and to fund growth projects. In base case scenario – building only Cotai sites 5/6, Singapore, Four Seasons condos and a reduced PA casino – Merrill estimates LVS needs to raise $2.75bn ($750mn to maintain covenant compliance, $2bn to fund growth). Their $7 PO assumes a common equity offering at $5.62, a 20% discount to the 11/7/08 close.

Capital raise, growth pipeline curtailment necessary
Firm estimates LVS will need to raise $750mn to $3.5bn in the form of convertible bonds, common/preferred equity, PIPE, or subordinated debt. This range encompasses sufficient capital to maintain US covenant compliance and: 1) fund its full growth pipeline, 2) proceed only with Cotai Sites 5/6, Singapore, the FS condos, and a scaled down PA casino, or 3) cancel all projects. See pages 4, 5, and 6.

Covenant issue, not a maturity issue, but default risk high
If LVS fails to raise sufficient capital to regain covenant compliance, it would need to seek amendments/waivers to its US credit agreement. If LVS were unable to secure amendments/waivers, its US subsidiaries would be unable to draw down on any available borrowings and it would be in default on its US facilities, airplane financings, convertible senior notes and senior notes. In a worst case scenario, there is a risk of bankruptcy.

- On the other hand NYT Dealbook is out with the following:

Casino giant Las Vegas Sands will detail its plans to handle its debt crisis early next week, according to a person close to the company, a development that may ease bankruptcy worries and could include another capital infusion by billionaire founder Sheldon Adelson, The Associated Press reported, citing a person close to the company.

Notablecalls: I think MLCO is way late to the game here. Not saying LVS is a buy here but I suspect it's not going to be an easy short around the $7 level.

FYI - so you know its out there.

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