Amid a slower-than-expected recovery in Macau, Las Vegas Sands (NYSE:LVS) is the latest casino operator to see its investment-grade credit mark pulled by a major ratings agency.
Fitch Ratings recently downgraded the Venetian Macau operator to ‘BB+’ from ‘BBB-‘ while maintaining “credit watch negative” on all Sands ratings. While acknowledging the operator’s prudent fiscal policies, Fitch questions the ability of LVS and competing Macau concessionaires to generate adequate cash flow against the backdrop of lingering travel restrictions.
The ability of operators in Macau to generate cash flows continues to be materially impacted by governmental COVID-19 policies. Fitch has updated its Macau gross gaming revenue (GGR) recovery curve to reflect performance in 2022-2024 compared to 2019 levels at -73%, -50%, and -30%, respectively,” says the research firm.
Fitch’s downgrade of Sands arrives with the shares down almost 16% year-to-date, 18.71% in the current and as analysts ponder the ability of Macau operators to survive without financial assistance from US parent companies, among other factors.
Las Vegas Sands Leverage Issues
Las Vegas Sands isn’t the only casino operator in the credit doghouse. In April, Moody’s Investors Service pared MGM Resorts International’s (NYSE:MGM) credit rating to “B1” from “Ba3,” moving the casino operator’s grade one notch further into non-investment grade territory.
Regarding Sands, its deteriorating credit strength is very much a symptom of its Macau exposure and elevated financial leverage — a trait of companies with junk credit ratings. It could be awhile before LVS regains investment-grade status.
“Fitch expects LVS’ gross leverage to remain elevated and inconsistent with investment grade until at least 2025. Gross leverage is forecasted to be 12.7x, 6.8x, and 4.4x in 2022, 2023, and 2024 respectively. Net leverage is slightly better but still inconsistent with investment grade until 2024,” adds the ratings agency.
Another issue to monitor is the Macau government requiring concessionaires to hold at least $625 million in capital at all times, indicating the special administrative region’s new gaming law is putting some financial onus on operators. It’s believed that for Sands China to achieve that objective, Las Vegas Sands will need to contribute $413 million to its Macau unit.
“The possibility of onerous capital commitments remains a key unknown until the public tender process is outlined by the government, which could occur in the near term. Potentially weaker operating economics is a reduced concerned since Fitch’s last review, given incremental clarity on proposed changes to the existing gaming law published by the Macau government,” according to Fitch.
LVS Liquidity Strong
A point in favor of LVS is a strong liquidity position that includes $6.1 billion in cash and no debt maturities until next year. In 2023, Sands China has $950 million on a credit revolver coming due. The following year, $1.75 billion in senior unsecured notes mature.
Las Vegas Sands has a reputation for being financially conservative, including resisting shareholder rewards in the face of the pandemic. That could minimize leverage expansion and potentially position the operator for a long-term return to investment-grade territory.
“Long-term, Fitch expects the company to manage its credit profile in a consistent manner, but the current operating environment in Macau has led to an extended period of time of weak financial metrics,” concludes Fitch.
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