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Fitch Ratings - New York - 01 Feb 2024: Fitch Ratings has upgraded the Long-Term Issuer Default Ratings (IDRs) for Las Vegas Sands Corp. (LVSC), Sands China, Ltd. (SCL) and Marina Bay Sands Pte. Ltd. (MBS), collectively Las Vegas Sands (LVS) to 'BBB-' from 'BB+'.
Fitch has also upgraded the senior unsecured bonds and revolver at LVSC and SCL to 'BBB-' from 'BB+'/'RR4'. Fitch has affirmed MBS' secured revolver and term loan at 'BBB-'. The Rating Outlook is Stable.
The rating reflects a strong rebound in the Macao market and outperformance in Singapore that has driven leverage metrics through Fitch's upgrade sensitivities. Fitch believes the pace of recent growth in Macao should allow LVS to continue to remain at investment grade metrics given the company's strong position in the premium mass market, along with positive FCF generation and strong liquidity.
LVS has a potentially heavy capital program, especially if it wins a New York City license, but Fitch believes the company is able to meet this funding without materially affecting the balance sheet. The rating also reflects potential weakness in the China economy, regulatory changes, and an increasingly competitive environment in Macao from new openings and expanded facilities.
The Stable Outlook reflects increasing visitation to and spend in Macao and Singapore. This has led to a normalization of operations and created abundant liquidity that protects LVS from pockets of economic weakness.
KEY RATING DRIVERS
Strong Leverage Metrics: Fitch calculates 2023 EBITDA leverage at 3.7x and net EBITDA leverage at 2.3x, which are both inside the upgrade sensitivities. The expectation of further market improvement in Macau and continued strong performance in Singapore should ensure credit metrics remain at these levels or even further improvement. Fitch believes LVS is willing to manage its balance sheet in a manner consistent with investment grade ratings, and the company has a solid track record of publicly articulating its leverage policy and adhering to prudent balance-sheet management. Management has stated a gross target debt ratio of 2.0x-3.0x before the impact of development projects.
The improvement in EBITDA leverage includes assumptions for the common dividend at $0.20 quarterly (estimated approximately $600 million annually), stock repurchases, and the resumption of a Sands China distribution in 2026. There are no assumptions for the New York City project, but if the company receives a license, it would be required to pay a $500 million licensing fee upfront. Given the assumption of strong FCF and high cash balances, Fitch believes these capital outlays are adequately financeable.
Macao Drives Credit Improvement: The strong rebound in Macau gaming revenues following the removal of travel restrictions in early-2023 is expected to remain an important driver of LVS's overall credit improvement. Fitch estimates that mass market baccarat has almost fully recovered to 2019 levels, particularly in the premium mass, which is the company's target market. Mass market baccarat was 91% of full year 2019 levels, although fourth quarter 2023 levels exceeded the fourth quarter of 2019.
Despite the rapid growth in gaming revenues, visitation and airline capacity remain below 2019 levels, and the rebound in those metrics should provide another source of further revenue growth over the near term. In addition, capital improvements, particularly at The Londoner, should further drive long-term growth for LVS. There is anecdotal evidence that the Macau mass market is becoming more promotional given the reduction in the VIP business due to regulatory changes, but LVS has not been materially affected by this given their strong quality of room product and non-gaming amenities.
In Singapore, LVS is realizing mass gaming revenue at record levels. Overall airport monthly passenger volume and aircraft seat capacity from China is still below pre-pandemic levels but has recovered to 87% to 2019 capacity in December 2023. Overall performance at MBS increased despite a major room renovation at the complex that left a significant number of rooms out of inventory. Phase I of the room refurbishment is mostly done, and Phase II is expected to be completed through 2024 and 2025. Completion of both phases will result in fewer rooms but a higher quality product to attract more affluent customers.
Meaningful Upcoming Maturities: LVS has a number of maturities that should be manageable in the context of strong liquidity and our expectations of a recovery in SCL cash flows. Fitch does not currently see a need for LVSC to support the Macao operations given the improvement in that segment. LVSC has open access to MBS' strong underlying cash flows, subject to a 4.25x MBS leverage test for unlimited access. MBS has $2.7 billion in borrowing capacity related to its ongoing construction projects.
SCL's $2.49 billion unsecured revolver was extended to July 2025, while $1.8 billion in unsecured notes mature in August 2025. LVSC has $1.75 billion in unsecured notes maturing in August 2024. Fitch believes the company's improving credit metrics and anticipated strong cash position should allow it to refinance and extend these maturities.
Manageable Development Pipeline: LVS is projecting $950 million in spending at MBS for a refresh of the existing hotel tower to introduce an improved suite product., which is expected to be completed by the end of 2025. A larger expenditure is expected to fund an expansion of MBS with a new hotel tower, incremental gaming, meeting, incentive, convention and exhibition (MICE) space, and entertainment venue. Details are of the final spending plan are still in discussions, but Fitch believes the costs are still manageable under the forecast horizon.
In Macao, the company committed to spending a minimum of MOP30.2 billion, or USD3.75 billion, over the 10-year concession term through 2033. This will skew primarily toward non-gaming amenities to further enhance SCL's footprint in Macao, although no additional hotel rooms were included in SCL's commitments. The magnitude will be manageable, from a cash flow perspective, as operations normalize and are reasonable in the context of SCL's historical capex spending.
LVS is also a bidder for a casino in New York. Given the uncertainty of receiving a bid and, if successful, the time frame for developing a casino, the project is not considered a key rating driver. If LVS wins the license, it would be required to meet a $500 million licensing fee. Fitch notes that LVS has a strong track record for developing large casino and entertainment projects.
Strong Ratings Linkage: Fitch analyzes LVS on a consolidated basis as the rating linkage between the parent and subsidiaries is strong. We deem MBS, which is almost fully recovered post pandemic, to be the stronger subsidiary and there are few restrictions inhibiting LVSC's access to MBS' cash. SCL has taken slightly longer to return to pre-pandemic levels, making LVSC the stronger parent as it has $4 billion of cash, receives royalty fees from MBS and SCL, and has access to MBS' cash flows and equity value. Fitch believes SCL has strong operational and strategic value to LVSC, which supports equalization of the ratings.
DERIVATION SUMMARY
LVS historically maintained an investment-grade credit profile due to high-quality assets in attractive regulatory regimes, a strong financial profile and a commitment to a conservative financial policy. In the long term, we expect LVS to manage its credit profile in a consistent manner, as the rapidly improving operating environment in Macao leads to stronger consolidated financial metrics.
Positively, the company took prudent steps to manage its balance sheet during the ongoing operating stresses caused by the pandemic. This included halting shareholder returns as operating cash flows declined and a public commitment not to resume them until cash flows stabilized at a level commensurate with growth.
Wynn Resorts Limited (BB-/Stable) has significant exposure in Macao, as well as Las Vegas and Massachusetts. Leverage is higher at Wynn while both have robust liquidity. Like LVS, Wynn has an aggressive capital spending and development program over the next few years.
LVS' peers include Seminole Tribe of Florida (BBB/Stable), which maintains lower leverage, enjoys a degree of exclusivity in a deep Florida market, and is not facing similar operating headwinds in the U.S., relative to LVS' jurisdictions that rely more on international visitation. Conversely, Seminole has less discretionary distributions, which partially fund tribal government operations, and is less diversified.
KEY ASSUMPTIONS
Macao revenues increase 14.5% in 2024 and 7% in 2025. SCL property EBITDA margins are forecast at 34% throughout the forecast horizon.
In Singapore, revenues increase 3% in 2024 and 2025, as market growth is offset by room disruption. EBITDA margins anticipated in the 47%-48% range.
Base interest rates applicable to the company's outstanding variable rate debt obligations reflects current SOFR forward curve.
Annual capex spending of approximately $1.5 billion in 2024 and $1.2 billion in 2025, which includes remaining development capex in Macao and Singapore, and some of the $3.8 billion committed to be spent in Macao in the new concession's 10-year term.
LVS announced a $0.20/per share dividend that began in 3Q23 and is expected to remain at this level throughout the forecast. Fitch assumes a resumption of the SCL dividend in 2026.
LVS maintains a material amount of excess cash, including its Las Vegas asset sale proceeds, given a conservative financial policy and the low likelihood of material capex in any new jurisdiction in the medium-term, should LVS pursue any new gaming licenses.
MBS capex is funded through property cash flows and Fitch does not expect its delayed draw term loan to be utilized in the near term.
Maturities at SCL and LVSC in 2024-2025 are refinanced, amended and extended.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
----The company maintains existing financial policies as EBITDA leverage is approaching below 3.5x and 3.0x on a gross and net basis, respectively, with some flexibility to go outside these thresholds temporarily during development cycles or periods of operating pressure;
Greater geographic diversification;
--Continued improvement of visitation into Macao, coupled with a commensurate improvement in underlying cash flow generation and gross debt at SCL that approaches pre-pandemic levels.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
--The company deviates from existing financial policies as leverage (debt/EBITDA) is sustained above 4.0x and 3.5x on a gross and net basis, respectively, with some flexibility to go outside these thresholds temporarily during development cycles or periods of operating pressure.
--Material deterioration in liquidity that affects the issuer's ability to fund capex and development projects.
LIQUIDITY AND DEBT STRUCTURE
LVS' liquidity is strong with $5.1 billion of unrestricted cash, as of Dec. 31, 2023. In addition, LVS has pending liquidity from a $1.20 billion sellers note it received upon the sale of its Las Vegas properties in 2022, and LVS has approximately $4.5 billion of aggregate revolver availability. The next material maturity is the $1.75 billion LVSC senior unsecured notes due in 2024.
Fitch expects consolidated LVS to generate strong FCF over the forecast horizon despite dividend payments and capital spending projects. This could be offset by future unannounced projects (including New York) and resumption of dividends out of Sands China.
ISSUER PROFILE
LVS owns and operates six casino resorts, including five in Macao and one in Singapore. LVS's Macao subsidiary, Sands China, is 70% owned with the balance being publicly traded on the Hong Kong Stock Exchange.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG CONSIDERATIONS
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
Source: Fitch Ratings
