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23 Oct 1997
MOODY'S ASSIGNS B3 RATING TO VENETIAN'S MTGE NOTES, Caa1 TO SR. SUB. NOTES, AND B1 TO BANK FACILITY
New York, 10-23-97 -- Moody's Investors Service assigned a B3 rating to the proposed $410 million of mortgage notes due 2004 of Las Vegas Sands, Inc. and its co-issuer and subsidiary, Venetian Casino Resort, L.L.C. The rating agency also rated the issuers' proposed $90 million of senior subordinated notes, due 2005, Caa1, and their proposed $170 million bank facility, due 2003, B1.
The company was formed to develop the Venetian Casino Resort, a Venice, Italy-themed, all-suite mega-resort situated on the site of the former Sands Hotel and Casino on the Las Vegas Strip. The project will be financed with the net proceeds of the offering, $320 million in equity contributions, $98 million in furniture, fixtures and equipment financing and $131 million in secured financing to construct a mall.
The ratings reflect the issuers' high leverage and single revenue source; the owner's first attempt at constructing and operating a major casino resort; remaining construction and engineering risks; and its initial reliance on convention, trade show and business conference customers who typically spend less time and money on wagering than other types of customers. Moody's cautions that, during the intermediate term, returns on the company's property may be negatively impacted by room and casino expansions at competitive sites and by new properties.
However, the ratings also recognize the attractiveness of both the location and of the property itself, with its Venice themed concept and premium quality rooms. Moody's believes that the resort, whose large shopping area should help attract walk-in traffic, can likely fill a high proportion of its rooms during the traditionally slower weekday periods due to its tie-in to convention, trade show, and conference business. The ratings are also supported by its fixed price construction contract, with multiple guarantees and contingencies.
The B3 rating of the mortgage notes also reflects its effective subordination to the bank facility and its size relative to the total capital structure.
Before the Venetian commences operations in April 1999, considerable further construction work has to be undertaken on both the tower and ground level developments. The company has completed $99 million of hard construction costs and entered into contracts with subcontractors for approximately 50% of its remaining $533 million of hard construction costs. In addition, the resort is on a "fast tracking" schedule whereby construction is initiated before all design documents are finalized. The resulting completion risks, however, are mitigated by several factors: the construction manager's guaranteed maximum price construction contract; a guaranty of the construction manager's obligations by its parent company, The Peninsular and Oriental Steam Navigation Company (A3); liquidated damages insurance; and the owner's $25 million completion guaranty.
While pre-opening risks are thus moderated, Moody's is concerned about the company's ability to extract gaming revenues from its hotel guests. The majority of the Venetian's guests are expected to be convention customers, who typically spend less time and money in the casino than other types of gamblers. Although the company is forecasting lower casino revenues than upper-tier Strip competitors to account for the higher mix of convention guests, its forecasted casino expenses are substantially lower than its competitors' despite similar casino space. The Venetian will also be at a disadvantage vis a vis some of its competitors because it will not have an established base of gaming customers. Consequently, Moody's believes that the issuers' projected casino margins may be somewhat optimistic.
Moody's is also concerned about the company's ability to achieve average daily room rates near its projected rate of $167. Major Strip expansion is expected through 1999 with the potential for close to 20,000 more rooms, some of which will also be high end premium rooms. With the addition of several properties of potentially similar quality opening prior to or close to the opening of the Venetian, including Mirage's Bellagio, Hilton's Paris, and Circus Circus's Paradise, as well as expansions to existing properties, including Caesars Palace and MGM Grand, there is a risk of an imbalance between growth in supply and demand on the Strip. While the hotel's physical and legal connection (through common ownership) with the Sands Expo Center's 1.1 million square foot convention facility as well as the casino's ownership of a new 500,000 square foot Congress Center should help occupancy rates, the large increase in capacity of premium rooms together with the significant overall increase in capacity may pressure room rates.
In light of the existing highly competitive environment in Las Vegas and the huge increase in capacity over the next several years, the performance of the Venetian's casino operations will also be affected by the company's success in creating a dynamic, exciting and emotionally engaging resort that becomes a "must-see" attraction. However, should the company succeed in creating an enticing property, we believe that it would be able to attract market share away from existing properties, similar to what the New York New York casino has been able to do, and grow the Las Vegas market.
The ratings also recognize the extensive operating experience of senior management at the Sands Hotel and Casino in Atlantic City and in the hotel industry. However, senior management has not had prior experience developing a Las Vegas resort or managing a resort of this size, and will be challenged to staff the resort with quality employees, especially in light of the anticipated expansion in Las Vegas. Moody's also notes that the Venetian will not have a pool of experienced employees to choose from as do several of its competitors. In addition to the Venetian, the company has plans to eventually construct a second 3000 room hotel and a casino next door, to be called Phase II, through the creation of a "special" subsidiary, which is similar to an unrestricted subsidiary. Although the development of this facility would be contingent upon obtaining financing, a project of this magnitude could be difficult to effectively manage and could result in cannibalization between the Venetian and Phase II if the combined facilities are not able to generate sufficient revenues.
Nevertheless, the location of the casino is excellent, domiciled across the street from two of the most successful properties on the Strip, the Mirage and Treasure Island. The Venetian will also include a 500,000 square foot mall with brand name shopping and dining, and a 50,000 square foot entertainment complex, all of which should help attract walk-in traffic into the casino and retain its guests once they arrive. In addition, since the most direct route to the Strip from the convention facilities will be to pass through the Venetian's physically connected property, this linkage should funnel a large number of these visitors through the casino and mall and benefit its gaming and non-gaming revenues.
Since there is typically a period of down-time between conventions in order to physically remove and set up exhibitions, the addition of the Congress Center will allow for the staggering of events between the Expo and Congress Centers so that conventions, trade shows and conferences can occur continuously without interruption. This, as well as the top quality of its proposed rooms, with its appealing size, amenities, and decor, should help fill the Venetian's rooms during weekday periods, which are typically slower to book throughout Las Vegas casinos than weekends.
On a pro-forma basis, the Venetian will be highly leveraged with $888 million in debt and $320 million in equity, or 74% debt and 26% equity. This assumes what Moody's believes may be an optimistic valuation of land at $5 million per acre, contributed by Sheldon Adelson, the sole stockholder. Due to the high construction costs of the resort and the issuers' substantial debt burden, coverage of fixed charges and liquidity could become problematic if the commensurate revenues are not achieved.
Proceeds from the offering will be deposited into separate accounts whereby proceeds from the senior subordinated notes will be used prior to the disbursement of funds from the bank facility and mortgage notes, which will subsequently be disbursed on a pro-rata basis. To the extent the project fails prior to its completion and there are funds remaining from the offering, the mortgage notes are secured by a first priority pledge in its escrowed proceeds.
The credit facility and the mortgage notes will be secured by a first and second priority lien, respectively, on substantially all of the assets of the issuers, excluding the mall assets when the mall becomes completed, and furniture, fixtures and equipment acquired with secured financing. The credit facility consists of $150 million in term loans and a $20 million revolver, which may be increased to $40 million. The term loans amortize on a quarterly basis in increasing amounts following the opening of the casino and will be paid down with 75% of the company's excess cash flow, as defined in the indenture.
The mortgage and senior subordinated note indentures have relatively customary covenants with the exception of the allowance under the restricted payments covenant of the transfer of 14 acres of land to an unrestricted subsidiary for the purpose of developing Phase II, and the transfer of certain assets relating to the development of the mall.
The Las Vegas Sands, Inc. and its co-issuer and subsidiary, Venetian Casino Resort, L.L.C., are wholly owned by Sheldon Adelson, and are developing the Venetian Casino Resort on the Las Vegas Strip. The company is based in Las Vegas, Nevada.
No Related Data.
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