NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the Issuer Default Ratings (IDRs) of Las Vegas Sands Corp. (LVS) and all of its subsidiaries at 'BBB-'. The Rating Outlook is Stable.
The subsidiaries affirmed include Las Vegas Sands, LLC (LVS LLC), Sands China, Ltd. (Sands China), VML US Finance, LLC (VML US), and Marina Bay Stands Pte. Ltd. (MBS). Fitch links all of the IDRs within the LVS corporate structure.
A full list of rating actions is at the end of this release.
KEY RATING DRIVERS
The affirmation reflects LVS' strong balance sheet and continued adherence to its financial policies. LVS publically states its target leverage of below 3.0x, which is well within Fitch's threshold for 'BBB-'. The 3.0x leverage target equates to about 3.5x using Fitch's calculation methodology, and Fitch's threshold for 'BBB-' IDR is 5x on a gross basis and 4x on a net basis. Fitch calculates LVS' consolidated gross and net leverage for the LTM period ending March 31, 2016 at 2.9x and 2.5x, respectively.
Management is developing a track record of adhering to its financial policies while ramping up its return to shareholders strategy. Amid the weakness in Macau, LVS has relaxed its previous investor guidance of buying back $75 million of stock per quarter and raising dividends by at least 10% per year. Since the Macau slowdown, LVS managed returns to shareholders in line with available cash flow, a practice that is more consistent with investment grade peers. The company repurchased $205 million in shares in 2015 and none in 1Q'16. LVS raised regular dividends by 10.8% in October 2015 but also stated that future dividend growth will depend on cash flows.
Per Fitch's base case forecast, LVS' consolidated leverage remains largely unchanged over Fitch's projection horizon. Current leverage metrics are consistent with Fitch's sensitivities for a 'BBB' IDR. The Stable Outlook reflects the risk that LVS adopts a more aggressive financial policy as it nears the end of its development cycle and that the Macau operations underperform relative to Fitch's base case. Fitch's forecast assumes Macau revenues will be largely flat through the Cotai development cycle, no other major development and LVS reducing the growth rate of its parent-level dividend to the low single-digit range.
Other key drivers for LVS' investment-grade IDR include its strong liquidity, robust discretionary free cash flow (FCF gross of project capex) and significant capacity to monetize non-core assets. LVS also maintains a strong business profile supported by high-quality assets in attractive regulatory regimes, which provides the company with one of the best global market exposure profiles in the industry.
LVS' recent settlements with the SEC and Sands China's former CEO help to alleviate regulatory and litigation overhangs; however, as of LVS' last quarterly disclosure a related investigation by the Department of Justice (DOJ) remains open. Another risk is LVS' concentrated ownership structure with Chairman and CEO Sheldon Adelson controlling 54% of the voting shares.
DEVELOPMENT PIPELINE
LVS' development pipeline is winding down with the St. Regis at Sands Cotai Central complete and the Parisian Macau expected to open in September 2016. The remaining $1.2 billion project costs for Parisian Macau are fully funded between forecasted cash flow generated in Macau and availability under the VML US senior secured revolver ($1.7 billion as of March 31, 2016).
Capex is expected to drop significantly in 2017. LVS' prospects for future, large-scale developments are limited due to the regulatory hurdles in jurisdictions where LVS is interested in developing. The legislative initiative to legalize casinos in Japan remains stalled, and Fitch believes there is low political inclination for expanding gaming to locals in South Korea.
MARKET OUTLOOKS
Fitch forecasts negative 5% market-wide gaming revenue growth in Macau for 2016, which assumes modest sequential growth in the mass market and leaves room for continued but milder weakness in the VIP segment. Past that, Fitch expects mid-single-digit growth in Macau led by China's rising middle class, the new capacity in Macau and infrastructure projects in and around Macau.
Fitch projects LVS' Macau revenues and EBITDA to decline by 7% and 10%, respectively, in 2016 and then rebound to approximately 2015 levels by 2017 as the Parisian ramps up, the market begins to recover and Sands China realizes operating synergies. The company identified $200 million of incremental synergies on 1Q'16 earnings call, including $60 million of cost savings and $140 million of labor and other expenses that will be shifted to the Parisian once it opens.
We expect Marina Bay Sands' operations to be stable with the asset benefiting from growing visitation to Singapore (up 6% on a LTM basis as of March 2016). Recent performance was negatively impacted by FX and adverse hold while underlying trends in gaming volume, lodging and retail have been more stable. Fitch expects Las Vegas' growing convention business, increasing air capacity and lack of new room supply to drive RevPAR higher in the near term.
ISSUE-SPECIFIC RATINGS
Fitch's ratings of LVS' U.S., Singapore, and Macau credit facilities are one-notch above the respective IDRs at 'BBB', reflecting their asset overcollateralization (OC). Asset disposition covenants in the credit agreements provide for certain carve-outs including the ability to sell certain retail assets in Macao and Singapore. The OC of the U.S.-based facility is not as great relative to that of Singapore and Macau; however, the facility benefits from LVS LLC's partial ownership of the Singapore and Macau subsidiaries and royalty fees from these subsidiaries.
KEY ASSUMPTIONS
Fitch's expectations are based on the agency's internally produced, conservative rating case forecasts. They do not represent the forecasts of rated issuers individually or in aggregate. Key Fitch forecast assumptions include:
--LVS consolidated revenues decline by 5% in 2016 due primarily to the decline in the broader Macau market. Growth resumes in 2017 at 5% following the first full year of Parisian Macau operations, which opens in September 2016. Consolidated revenues grow by low-single digits thereafter.
--Fitch estimates property EBITDA margins of 34%-35% through the forecast horizon.
--LVS corporate dividends grow in the low single-digit range in 2017 and thereafter, there are no share repurchases, and no other development capex is undertaken.
RATING SENSITIVITIES
An upgrade to 'BBB' is possible if the company continues to maintain its existing financial policies and leverage remains below 3.5x and 3.0x on a gross and net basis, respectively, for an extended period of time. A renewal of the concession in Macau, which expires 2022, would help build support for an upgrade.
LVS increasing diversification through entry into new markets could be a long-term positive However, Fitch would weigh the diversification benefit against the potential related debt incurrence, available liquidity at the time of the development and the return-on-investment prospects.
A downgrade is unlikely in the near term given the company's strong financial profile. However, negative rating pressure could be caused by leverage exceeding 5x on a gross basis and 4x on a net basis for an extended period, likely driven by pursuing multiple large-scale projects at once or deviating from its articulated financial policies.
LIQUIDITY
LVS' liquidity is strong, with $1.3 billion in excess cash net of $400 million in estimated cage cash. Capital spending related to the Parisian Macau will wind down in 2017 and the project is fully funded between Macau-generated cash flow and revolver availability under the Macau credit facility. Maturities are manageable. LVS has $971 million in 2018 and $2.3 billion in 2019 of amounts outstanding on its senior secured credit facilities coming due, mostly in Singapore and Macau.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following ratings:
Las Vegas Sands Corp.
--IDR at 'BBB-'; Outlook Stable.
Las Vegas Sands LLC
--IDR at 'BBB-'; Outlook Stable;
--Senior secured credit facility at 'BBB'.
Sands China Ltd. (Sands China)
--IDR at 'BBB-'; Outlook Stable.
VML US Finance LLC (VML US)
--IDR at 'BBB-'; Outlook Stable;
--Senior secured credit facility at 'BBB'.
Marina Bay Sands Pte. Ltd. (MBS)
--IDR at 'BBB-'; Outlook Stable;
--Senior secured credit facility at 'BBB.
Date of Relevant Rating Committee: June 16, 2016]
SUMMARY OF FINANCIAL STATEMENTS ADJUSTMENTS
-Leverage: Fitch subtracts distributions to minority holders of non-wholly owned consolidated subsidiaries from EBITDA for calculating leverage.
Additional information is available on www.fitchratings.com.
Applicable Criteria
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers (pub. 05 Apr 2016)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=879564
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1006228
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1006228
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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