Standard & Poor’s (S&P) stripped Las Vegas Sands (NYSE:LVS) of its investment-grade credit rating, citing a slow recovery in Macau this year.
The ratings agency lowered its grades on LVS and the operator’s Sands China unit to “BB+,”or one notch into junk territory, from “BBB-.” S&P maintains a negative outlook on the gaming company’s debt while revising its base case for Macau rebounding this year.
Our current base case assumes Macau’s GGR will be 30 percent-40 percent of the 2019 level in 2022, down from the 60 percent-70 percent we forecast previously,” said the research firm. “The company’s Macau resorts are heavily weighted toward mass market play, and GGR in this segment should improve to 45 percent-55 percent of pre-pandemic levels from about 35 percent in the fourth quarter of 2021.”
While shares of Sands are up 27 percent year-to-date and are earning praise from Wall Street, the operator is highly tethered to Macau. The special administrative region (SAR) is the company’s largest market, as it runs five integrated resorts there, confirming its credit and equity are correlated to the goings-on in the world’s largest casino hub.
China Holds Macau Cards
China’s zero-tolerance policy regarding COVID-19 is a stumbling block for Macau operators, including Sands. That’s because it leads to restricted travel when outbreaks occur, keeping gamblers away from the SAR.
There is some positive movement on that front, as Macau authorities said today that the gaming center is open to visitors from Hong Kong and Taiwan — as long as those travelers are vaccinated against the coronavirus. That’s relevant to LVS and rivals, because after mainland China, Hong Kong and Taiwan are two of the largest feeder markets for Macau.
“We revised our base-case forecast for Macau because we believe that the resumption of travel between Macau and Mainland China in 2022 will be slower than we initially anticipated, amid rising Omicron cases and tightening junket activity,” notes S&P.
The ratings agency estimates that LVS’s earnings before interest, taxes, depreciation and amortization (EBITDA) will be 35 percent to 50 percent of 2019 levels this year and 80 percent in 2023. However, S&P is constructive on recovery among mass-market gamblers – a positive for Sands because that’s the operator’s core constituency.
LVS Credit Upgrade Unlikely Soon
Given the downward revisions to its 2022 Macau outlook, S&P forecasts LVS will end 2022 with leverage of 7x, well above the 4.5x downgrade threshold for issuers in the “BB+” category.
“We are willing to look out to 2023 for LVS to restore credit measures because of the company’s high-quality asset portfolio and our belief that its gaming markets and assets will eventually recover along with leisure, business, and group travel,” said the ratings agency.
At the end of last year, Sands had $5.5 billion in cash and revolver availability — a figure that should grow as it wraps up the $6.25 billion sale of its Las Vegas assets.
For investors hoping Sands will restore its dividend, they may be waiting a while. S&P believes the company will prioritize investing in its assets and improving credit quality before resuming the payout.
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