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10 Nov 1999
MOODYS LOWERS THE RATINGS OF THE VENETIAN'S FIRST MORTGAGE NOTES TO Caa1, ITS SR SUB NOTES TO Caa3, AND ITS CREDIT FACILITIES TO B2; OUTLOOK NEGATIVE
Moody's Investors Service lowered the ratings of the Las Vegas Sands, Inc. and its co-issuer and subsidiary, Venetian Casino Resort, L.L.C.'s $425 million of 12.25% mortgage notes, due 2004, to Caa1 from B3, its $97.5 million of 10% senior subordinated notes, due 2005, to Caa3 from Caa1, and its $190 million bank facility, due 2003, to B2 from B1. In addition, its senior implied rating was lowered to B3 from B2 and it senior unsecured issuer rating was lowered to Caa2 from Caa1. The rating outlook is negative.
The lower ratings reflect the company's weak operating results since opening; its tight liquidity and limited financial flexibility; and its significant contingent obligations arising out of liens that have been filed by the company's general contractor and subcontractors. The ratings also reflect our belief that operating performance in 2000 will continue to result in tight liquidity whereby we expect that the company will have difficulty meeting its 2000 interest and principal obligations, which total about $162 million (excluding principal and interest on the company's soon to be non-recourse funded mall subsidiary) and minimum maintenance capital expenditures of about $15 million. The ratings continue to reflect the company's lack of property diversification; its high debt levels; and increased competition on the Las Vegas Strip.
However, the ratings also recognize the company's improvement in operating results to date; the attractiveness of the Venetian's property, including its themed mall and high quality rooms; its numerous dining and entertainment amenities; and the benefits from its connection to a large conference and convention center.
The downgrade of the senior subordinated notes to Caa3 from Caa1 also reflects a greater potential for severity of loss due to the company's weaker than anticipated operating results and potential for additional liabilities associated with the company's contingent liabilities.
The negative outlook on the ratings is based on our concerns about the company's ability to quickly improve its operating results to a level that will enable it to meet its fixed payment obligations in 2000 and thereafter. The negative outlook also reflects the uncertain outcome over the resolution and potential liability of liens filed against the company that total over $300 million.
Moody's primary concerns with the company's business risks fall into three areas, including: (1) liquidity; (2) ability to operate at a level that is significantly higher than current levels; and (3) contingent liabilities.
With regard to liquidity, the company has $31 million in interest payments due on November 15th on its mortgage notes and senior subordinated notes. Moody's expects that the company will require external funds in order to make this payment. The company's owner Sheldon Adelson has implied several times on the company's conference calls that he will personally ensure that the November 15, 1999 payments are made, and we expect that he will honor his commitment. However, while we do not believe that the company's immediate liquidity will be an issue, the Venetian's liquidity in 2000 and thereafter is a concern. Excluding the company's mall subsidiary, in 2000 it will be obligated to pay about $90 million of interest expense and bonding fees, $17 million of principal due on equipment financing, and $55 million in principal due on its drawn bank facilities. Even assuming that the company is able to extend the maturity dates of its bank principal amortization in 2000, Moody's expects that liquidity will still be tight.
Based on the company's recent operating results and Moody's expectations for the property next year, Moody's expects that the property (excluding the mall subsidiary) will generate EBITDA of $120 to $140 million in 2000. Under this scenario, assuming that the company is able to defer principal amortization requirements on its credit facilities, the company will have little room for error given its $90 million of interest expense and bonding fees, $17 million of principal due on equipment financing, and about $15 million of minimum maintenance capital expenditures. Consequently, it is possible that the company may continue to need external capital in 2000.
The Venetian opened its facilities on May 4, 1999 partially complete and has since been ramping-up its business as its property is practically finished. The company's operating results, while negatively impacted from its "soft" opening, have been significantly below expectations. Although the Venetian's operating results have demonstrated improvement since opening, Moody's believes that it faces several challenges with significantly improving its results over recent levels.
Since opening, the company has improved its occupancy and room rates as well as its table game "drop" (the amount wagered at its table games) to impressive levels. Nevertheless its "hold" on its table games (the amount retained by the casino), its slot machine business, and its casino margins have been disappointing. Although Moody's expects that the Venetian's table games business will eventually normalize at a more traditional hold rate, Moody's is concerned that the company may need to maintain a high level of marketing expenses in order to retain its high table "drop" levels. Management has indicated that the company has had to spend more money on marketing costs than it originally anticipated in order to attract business, which is a factor in the company's high casino expenses. As the company does not have a large database of quality repeat gaming customers to draw from since it is a start-up operation, Moody's believes that it may be difficult for the company to significantly improve its table game income and margins over the next several years.
The slot machine business for most casinos tends to be a high margin business due to its highly predictable pay-outs, low required labor costs to operate, and absence of bad debt reserves (compared to table games which require bad debt reserves, more labor, and higher promotional costs). The Venetian's low volume of slot business to date is particularly negative from a credit perspective due to the high margins and stability that result from the low volatility of this business. While recent openings of additional amenities at the Venetian and the company's enhanced marketing efforts should help to drive additional slot machine business, the company is facing stiff competition. Over the past year, three competing "must-see" properties opened on the Las Vegas Strip, including Bellagio, Mandalay Bay, and Paris, and the MGM Grand completed a major refurbishment. Similar to the challenges the company faces with improving its table game business, the Venetian does not have a long-standing database of loyal slot machine customers to draw from. In addition, the company fills a high proportion of its rooms (40% to 50% on average) with convention and conference guests. While this is positive factor for keeping the hotel full and helps the company charge high room rates, Moody's expects that these customers tend to gamble less than non-convention and conference guests. Furthermore, the Venetian's northern strip location may be making it difficult for the casino to attract a high level of walk-in traffic.
The Venetian's revenues per available room (a factor of room and occupancy rates) and room income have recently been ahead of expectations. Average room rates have reached the high $100 range, which is well above Las Vegas standards, and occupancy rates have been above 90%. Moody's expects that these positive results are largely attributable to the high quality of the Venetian's rooms as well as the hotel's attachment to Las Vegas's largest convention and conference space. The property's link to its conference center and to the Sands Convention Center should help the company to maintain its strong room and occupancy rates. While room rates have substantially increased since opening, Moody's expects that it may be difficult for the company to significantly improve over its current rate of revenues per available room due to the large difference in rates that the Venetian already commands compared to its competitors.
In addition to liquidity and operational issues, the third primary concern regarding the company's businesses risks is the significant contingent liabilities resulting from mechanic liens filed by the Venetian's contractor and sub-contractors. With over $300 million of liens claimed against the Venetian, the company purchased approximately $450 million in bonds to bond over the liens (Nevada law requires bonds be 150% of liens). The company has indicated that many of these liens are duplicative and excessive, and that it could possibly take many months or years to resolve who is liable. Should the court ultimately determine that the company is liable for any of these claims, the company's fragile liquidity would be further weakened. To the extent that the company's bonding agencies are ultimately required make payments to lien holders, we expect the company's liability to the bonding agencies for such payments would primarily be unsecured obligations.
The Las Vegas Sands, Inc. and its co-issuer and subsidiary, Venetian Casino Resort, L.L.C., own and operate the Venetian Casino Resort on the Las Vegas Strip. The company is based in Las Vegas, Nevada.
No Related Data.
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