Fitch Ratings - New York - 22 Dec 2022: Fitch Ratings has affirmed the 'BB+' Issuer Default Ratings (IDRs) of Las Vegas Sands Corp. (LVSC), Sands China, Ltd. (SCL), and Marina Bay Sands Pte. Ltd (MBS, collectively LVS). In addition, Fitch has affirmed LVSC's and SCL's unsecured debt at 'BB+'/'RR4 'and MBS's secured debt at 'BBB-'/'RR2'. Fitch has removed the Rating Watch Negative for all of LVS and its subsidiaries' ratings. The Rating Outlook is Negative.
The removal of the Rating Watch reflects SCL's signing of a new, 10-year gaming concession in Macau on December 16, with reasonable terms and commitments, in Fitch's opinion. Visitation recovery remains a key risk and supports the Negative Outlook, given LVS' still high leverage metrics that are balanced by strong excess liquidity. Fitch's forecast continues to result in LVS regaining 'BB+' gross leverage metrics by 2024, but net leverage metrics are stronger and consistent with a 'BB+' rating beginning in 2023.
KEY RATING DRIVERS
Recovery Trajectory Driving Outlook: The removal of the concession overhang eliminates a material credit risk; however, the recovery of gross gaming revenues (GGR) and visitation into Macau remain a key credit concern, despite positive recent developments. Fitch's Base Case contemplates Macau GGR performance in 2023-2025 at 50%, 70%, and 90% of 2019 levels, respectively.
Fitch believes pent-up demand is possible for gaming and leisure-oriented activities following nearly three years of pandemic restrictions for Mainland gamblers in China. Other global gaming jurisdictions experienced fast recoveries to pre-pandemic levels of demand once travel restrictions were lifted, often less than one year (e.g. Las Vegas in 2021, Singapore expected in 2023). Visitation remains significantly depressed and monthly visitation and GGR figures will influence Fitch's degree of confidence in whether a recovery begins to take hold.
The recent easing of travel restrictions and COVID-19 protocols by the Chinese, Macau and Hong Kong governments is a positive, but its impact to Macau's operating performance will be more meaningful by mid-2023 given the rapidly increasing number of COVID-19 cases in China. China and Macau's exit from "Zero COVID" is also still in a nascent stage, and it remains to be seen how macro and other policies will respond during this critical transition period.
As the virus circulates more widely, a temporary period of economic volatility may be unavoidable, given China's limited levels of naturally acquired immunity, comparatively low vaccine booster coverage for the elderly, and the experience of other economies that have pursued a similar path.
Delayed De-levering Trajectory: Fitch expects LVS' gross leverage to remain elevated and inconsistent with investment grade until at least 2025. Gross leverage is forecasted to be 6.9x, and 4.4x in 2023 and 2024, respectively. Net leverage is stronger but still inconsistent with investment grade until 2024. LVS' net leverage will be back in the 2x range beginning 2024 under Fitch's assumption that shareholder returns do not resume until 2024, and their payout relative to cash flow is consistent with pre-pandemic levels.
Longer term, Fitch believes LVS is willing to manage its balance sheet consistent with investment grade and that the pandemic has not altered its long held conservative financial policies. LVS has a solid track record of publicly articulating its leverage policy and adhering to prudent balance sheet management. This includes reducing shareholder returns and debt in 2015 amid deterioration in Macau operations, halting shareholder returns during the pandemic, and maintaining its Las Vegas asset sale proceeds as excess liquidity.
Meaningful Upcoming Maturities: LVS has a number of maturities approaching that should be manageable in the context of its strong liquidity and Fitch's expectation of a recovery in SCL cash flows. This includes $6.1 billion in cash (including cage cash), of which $1.4 billion is at SCL, $745 million is at MBS, and $3.9 billion is at LVSC. However, persistent operating weakness in Macau may require LVSC to further support SCL, which in turn would reduce its own financial flexibility. Positively, LVSC has open access to MBS' strong underlying cash flows (subject to a 4.25x MBS leverage test for unlimited access, Fitch estimate: 2.6x for YE2022) and MBS has $2.6 billion in borrowing capacity related to its ongoing construction projects.
SCL's $1.45 billion unsecured revolver matures in July 2023 and $1.8 billion in unsecured notes maturing August 2025. Of note, SCL's revolving credit facility relationship banks have been supportive throughout the pandemic and provided covenant relief as recently as November 2022. LVSC has $1.75 billion in unsecured notes maturing August 2024.
Concession Overhang Removed: All six incumbents were awarded new 10-year gaming concessions that were signed on December 16, 2022. The potential for losing a concession previously drove LVS' Negative Rating Watch, combined with the potential for more onerous operating terms and capital commitments, none of which transpired. Fitch views the completion of the concession process positively for Macau's gaming regulatory environment relative to other global gaming jurisdictions, given the government's pragmatic approach.
The new gaming law and capex commitments under the new concessions are reasonable and the concession re-bidding process was executed efficiently. In addition, all US-based operators received new concessions despite previous investment community concerns of US-Sino relations and speculation of their potential impact on the concession process.
Manageable Development Pipeline: LVS is spending an aggregate $4.3 billion in Singapore (including a $1.1 billion one-time payment already made in second-quarter 2019) to expand Marina Bay Sands with a new hotel tower, incremental gaming and MICE space, and a 15,000-seat entertainment venue. This also includes a $1 billion refresh of the existing hotel tower to introduce improved suite product. The MBS expansion project spending will not ramp up until 2024 due to pandemic-related delays, while the $750 million left to spend on Towers One and Two will be spent from 2022-2023. There are minimal funding concerns and the Singapore projects are viewed positively from a return perspective and will increase residual equity for LVSC.
In Macau, the company committed to spending a minimum of MOP 30.2 billion (~$3.8 billion) over the 10-year concession term through 2033. This will skew primary toward non-gaming amenities to further enhance SCL's footprint in Macau, though 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. As of YE2022, the company has completed the $2.2 billion conversion of Sands Cotai Central into the Londoner in Macau, as well as the Grand Suites at Four Seasons Macau and Londoner Court.
Strong Ratings Linkage: Fitch mainly analyzes LVS on a consolidated basis because the rating linkage between the parent and subsidiaries is strong. Currently Fitch deems 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. In relation to SCL, which has been struggling post-pandemic to date, LVSC is 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 that SCL has strong operational and strategic value to LVSC, which supports equalization of IDRs. Per Fitch's base case assumptions, by 2025, when Macau GGR will recover to 90% of 2019 levels supported by more relaxed COVID policies, Fitch expects all three entities to have similar standalone credit profiles, which was the case prior to COVID. To the extent, the Macau gaming market recovery meaningfully underperforms Fitch's expectations for the recovery trajectory (50% by 2023 and 70% by 2024), Fitch could consider negatively differentiating SCL's IDR from LVSC and MBS to account for LVSC's limited resources to indefinitely support SCL.
The long-term ability to support SCL should Macau's recovery remain prolonged is becoming an increasingly forefront concern in light of upcoming major maturities at both LVS and SCL, large capex program at MBS, and the recent volatile state of the capital markets.
DERIVATION SUMMARY
LVS historically has maintained an investment-grade credit profile due to its high-quality assets in attractive regulatory regimes, strong financial profile and commitment to a conservative financial policy. Long term, Fitch expects the company to manage its credit profile in a consistent manner, but the operating environment in Macau has led to an extended period of time of weak consolidated financial metrics.
Positively, the company took prudent steps to manage its balance sheet during the ongoing operating stresses caused by the pandemic. This includes halting shareholder returns as operating cash flows declined and its public commitment not to resume them until cash flows have stabilized and at a level commensurate with their growth.
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 that partially fund tribal government operations and is less diversified. Genting Berhad (BBB/Stable) and its subsidiaries have international diversification similar to LVS, which includes some degree of economic exclusivity (Malaysia, Singapore) and some subject to more competition (Las Vegas, New York). Its leverage is lower than LVS' and its end markets have enjoyed a faster recovery relative to Macau's.
KEY ASSUMPTIONS
--Macau revenues are down 50%, 30%, and 10% from 2023, 2024, and 2025, respectively, compared with 2019 levels. SCL property EBITDA margins of 22%, 33%, and 39% forecasted for 2023, 2024, and 2025;
--In Singapore, revenues approach pre-pandemic levels in 2023. The faster recovery in Singapore is supported by the updated premium suite product and the nation's continued recovery in international visitation. This assumption does not yet include material inbound Chinese visitation, which could further increase MBS' performance. Property margins in the low 50% range;
--Annual capex spending in $1.0 billion-$1.4 billion range through 2025, which includes remaining development capex in Macau and Singapore, as well as some of the $3.8 billion committed to be spent in Macau during the new concession's 10-year term. No share repurchases are assumed. Fitch assumes the resumption of dividends coincides with the stability and growth of operating cash flow, which is during 2024 per the agency's assumptions. Fitch forecasts a payout ratio relative to total EBITDA that is consistent with pre-pandemic levels;
--LVS maintains a material amount of excess cash, including its Las Vegas asset sale proceeds, given its 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 2023-2025 are refinanced/amended & extended.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
--A track record of improved visitation into Macau, coupled with a commensurate improvement in underlying cash flow generation at SCL could result in the Outlook being revised to Stable;
--The company maintains its existing financial policies and leverage (debt/EBITDA) sustains below 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
Factors that could, individually or collectively, lead to negative rating action/downgrade:
--Macau operations fail to meet expectations of improvement, leading to worsening credit metrics and reduced confidence in the company's ability to refinance upcoming maturities at SCL and LVSC. This could lead to SCL's IDR and instrument ratings being downgraded should Fitch reconsider the application of its PSL criteria;
--The company deviates from its existing financial policies and leverage (debt/EBITDA) sustains above 5.0x and 4.5x on a gross and net basis, respectively, with some flexibility to go outside these thresholds temporarily during development cycles or periods of operating pressure. Fitch expects gross leverage to return within the negative rating sensitivities by YE 2024. A material deviation from this timeframe due to an earlier restart of shareholder friendly activity or worse than anticipated recovery trajectory could lead to negative rating action.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
LIQUIDITY AND DEBT STRUCTURE
LVS' liquidity is strong, with $5.8 billion excess cash net of $400 million in estimated cage and system cash as of Sept. 30, 2022. LVS received meaningful cash proceeds from the Venetian sale during 1Q22, the total consideration of which was $6.25 billion (includes a $1.2 billion sellers note). In addition, LVS has roughly $2.9 billion of aggregate revolver availability. The nearest maturities include the $1.4 billion outstanding under the revolver at SCL in 2023 and $1.75 billion LVSC senior unsecured note coming due 2024.
Fitch expects consolidated discretionary FCF (cash flow from operations minus maintenance capex) to turn positive in 2023 and accelerate meaningfully in 2024, thanks to Singapore's strong performance and Macau's expected recovery. However, LVS has development capex in Singapore and may look to resume its dividends as operations normalize. Therefore, Fitch-defined FCF could potentially remain negative through Fitch's forecast horizon depending on the company's pace of dividend resumption.
ISSUER PROFILE
LVS owns and operates six casino resorts, including five in Macau and one in Singapore. LVS's Macau 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
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This 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. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
Source: Fitch Rating
