Trying economic times test Las Vegas Sands Corp’s relationship with the Macau government
It wasn’t long ago that Sheldon Adelson was singing the praises of the Macau government as one of the most investorfriendly his company had ever dealt with.
Last month, however, his right-hand man William Weidner, the President and Chief Operating Officer of Las Vegas Sands Corp (LVS), hinted that the love-in is over. It follows the company’s suspension of new construction and laying off of up to 11,000 building workers on its Cotai site.
On November 10th, LVS said it was suspending several projects in Macau and elsewhere, and had agreements to raise US$2.14 billion in new capital. The company said it would temporarily shut down sites five and six along Macau’s Cotai Strip™ including a Shangri-La/Traders hotel tower, a Sheraton hotel tower and three casinos— part of the company’s US$12 billion master plan to develop Cotai.
The company said other projects, however, were still on track, including the US$3.6 billion Marina Bay Sands, scheduled to open in Singapore at the end of 2009.
The announcement of the Macau project suspensions came after Sands said in a filing to the US Securities and Exchange Commission that without fresh funding, come 31st December it would be in danger of breaching existing lending covenants and defaulting on US$5.2 billion in credit facilities secured by its Las Vegas operations.
“Macau, because of what has happened, has kind of created for itself unfinished or semi-finished projects. I don’t think we’re alone in not completing developments,” Mr Weidner told journalists on the opening day of the G2E Global Gaming Expo in Las Vegas last month.
Mr Weidner was, however, gracious enough to acknowledge that political events, let alone economic ones, were not immediately in Macau’s control.
“There have been some changes in the central government’s attitude towards Macau. We don’t think it’s necessarily all that prudent to put more money in until we see how that attitude works its way out.”
Even allowing Mr Weidner the executive defence of being quoted out of context, some might see his viewpoint as a decidedly partial and even disingenuous analysis of events. The reason that auditors issued a warning about the future viability of LVS a few weeks ago had very little to do with the rationing of visits to Macau for heavy gamblers by the Chinese government. It had everything to do with a general crisis of international confidence and a highly leveraged company being caught up in an extraordinary global credit crisis and being unable to sell its project to the debt market.
Mr Adelson’s rival Steve Wynn has previously said he takes no pleasure from his competitors’ discomfort in the current turmoil, but his media statements since then have done a passing impression of a gloat.
“If someone tries to build six hotels at once and finds the market can’t accommodate it, there’s a problem with the planning,” Mr. Wynn said in an interview with Bloomberg Television.
“The government attempt to moderate the impact of explosive growth in Macau was well considered and well timed,” suggested Mr Wynn.
“There’s no question the economy had been overheated. If people who work for us can’t afford to live in apartments in the city, that is surely a sign that expansion had been too rapid.”
All things to all people
In his November annual policy address, Macau Chief Executive Edmund Ho sent out typically mixed signals on the troubles plaguing LVS. On the one hand, he indicated no direct financial help would be forthcoming from the government. On the other, he suggested no venue would be allowed to fall off the map on his watch.
Being all things to all people is probably second nature to a leader used to having to meet the aspirations of Macau citizens and the Beijing government in the same breath.
During his policy address, Mr Ho commented that LVS’s funding difficulties were understandable: “Because of its overleveraged borrowing in the US and around the world, it’s normal and expected that it has to suspend some of its projects.”
Giving rise to hopes of government intervention to help LVS, Mr Ho said: “If necessary, the government will take over. We will not allow any casinos to shut down.”
But in the same session, when asked if he would lead a local bail out of LVS, Mr Ho replied in a Delphic manner.
“Until now, the Macau government has no concrete measures to help it solve its financing difficulties immediately,” he said.
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The idea that in a worst case scenario LVS’s Macau assets might be ‘nationalised’ raises the interesting question of exactly what was written in the small print of the original agreement between LVS and the Macau SAR. It seems highly unlikely that LVS or lawyers and accountants representing any potential creditors would simply be prepared to walk away from billions of dollars of infrastructure investment.
Rumours before the policy address that the Macau government might cut gaming tax from its current 35% rate to help operators cope with Beijing’s travel curbs and the global financial crisis, proved unfounded.
Mr Ho did, though, unveil a 10.2 billion patacas stimulus package to counter the local effects of the revenue slowdown caused by travel restrictions from China, and the global credit crisis. The package focused on investment in public housing, in the territory’s first light rail system and other infrastructure projects. Macau will also lower personal income taxes.
The ‘we support you, but not with direct cash’ approach to LVS is not fundamentally different from that of the Singapore government regarding the Marina Bay Sands. Despite warm words from the Singapore Tourism Board (STB) in late October that it was in talks with LVS to ‘facilitate the success’ of Marina Bay Sands, the authorities stopped short of saying they would give financial guarantees to the project.
“STB is monitoring the situation and is aware that the current uncertain economic climate may give rise to concerns,’’ the Board said in a statement to local media.
In any case, the consensus view among analysts seems to be that Singapore is the least of LVS’s worries.
Arguably Singapore needs LVS as much, if not more, than LVS needs Singapore. The citystate has awarded only two licences, each for a single resort, the other permit going to a consortium led by Malaysia’s Genting Group, which is building Resorts World at Sentosa. Any withdrawal of LVS would leave Genting with a monopoly and would potentially deal a fatal blow to Singapore’s aspiration of using gaming to boost tourism and increase national GDP by 0.5% per year.
Even if, in a worst-case scenario, Macau were to lose LVS’s gaming, hotel and conference capacity, the territory would remain the biggest legal casino jurisdiction in the Asia Pacific region both in terms of revenue and number of venues.
LVS has nearly 25% of the gaming market in Macau by revenue. The Venetian Macao took US$2.18 billion in revenues during its first 12 months of operation. At last estimates, Macau accounted for nearly 70% of all LVS revenues.
Mr Ho added he expected Macau’s monthly gross gambling revenue to drop to about seven billion patacas (US$876 million) next year from about eight billion patacas (US$1 billion) a month this year.
“We expect there certainly will be some downward pressure on the entire gaming industry next year,” said Mr Ho.
“On one hand, we have to be cautious, but on the other, we shouldn’t be too pessimistic.”
