An indication of just how keen Las Vegas Sands Corp (LVS) is to finish the work it started on Macau’s Cotai strip came late last week.
Bloomberg in New York reported LVS is willing to pay 400 basis points (i.e., 4 percent) above the London interbank offered rate (LIBOR) for credit to help complete the now famous plots five and six on Cotai.
If LVS is going out into the credit markets to finish Cotai, it raises the interesting question of just how LVS intends to spend the estimated USD2 billion equity it hopes to raise from its initial public offering on the Hong Kong stock market, expected in November.
Michael Leven, LVS’s Chief Operating Officer, told Bloomberg the company was willing to contribute additional equity to the Cotai project, but didn’t specify how much. Mr Leven was quoted as estimating the total cost of completing the four hotels on plots five and six as USD3.6 billion (i.e., an additional USD2 billion from what LVS has already spent on the plots). Mr Leven said subject to the financing deal, five and six could be finished by June 2011.
Will LVS take a similar approach to Wynn Resorts and use the Hong Kong IPO cash firstly to improve its balance sheet at home in the United States and then secondly to leverage that improved balance sheet to seek further finance—whether via bank loans or bonds? It certainly looks that way.
Bloomberg said banks looking at an LVS Cotai loan deal include Bank of China Macau, Banco Nacional Ultramarino, Barclays Capital, Calyon, Citigroup, DBS Bank, Goldman Sachs, Mizuho Corporate Bank and UOB.
The financing deal is said to be split between a revolving credit and a term loan, both with five-year tenures, according to Bloomberg’s sources. LVS is said to be looking for commitments of USD200 million to USD300 million from individual banks.
LVS may have no choice other than to offer a big margin on LIBOR, given that its Asian enterprise offers potentially very high returns but still appears to be classified by some credit providers as high risk.
Nonetheless, by setting out its terms publicly now, LVS may be trying to set up a market among credit suppliers. If the Hong Kong IPO goes well, as expected, the chances are that will excite the interest of credit institutions not already in the market for LVS debt. Competition between lenders could result, in its turn, in LVS paying significantly less than 400 basis points above LIBOR for the privilege of Cotai cash. The lenders’ collateral could perhaps come in the form of some call on future earnings, though LVS chairman Sheldon Adelson and his team would have to tread a fine line between satisfying the expectations of the company’s patient shareholders and those of the lenders.
A call on future Macau earnings would seem at this stage to be more attractive as collateral than liquidity via real estate sales. LVS’s efforts at monetisation of its existing real estate on Cotai have not so far yielded a headline-making deal—possibly because of a perception in the markets that LVS was sticking too firmly to its high valuation guns. The write-downs on real estate values at MGM MIRAGE’s CityCenter project in Las Vegas are unlikely to have reassured the markets about the current financial muscle of gaming real estate. LVS is arguably though a very different animal to MGM MIRAGE in terms of the former’s current business potential.
The Cotai plots—due to feature four hotels under the St Regis, Shangri-La, Traders and Sheraton brands—have become a potent symbol in the Asian gaming industry. Some experts, including Steve Wynn, who think LVS was initially too bullish on Macau, use the spectral presence of the unfinished plots five and six as a kind of scary bedtime story. ‘Go cautiously on Macau or the Cotai bogeyman will get you,’ seems to be the message.
For Mr Adelson and his team, plots five and six are not nightmares but sweet dreams yet to be realised. We’ll know shortly whether the equity and debt markets agree.
