In a possible hint that investment-grade status may be within reach, Moody’s Investors Service recently upgraded the credit rating outlook of Las Vegas Sands (NYSE: LVS) to “stable” from “negative”. The research firm maintained a “Baa3” rating on the company and a “Baa2” grade on the Sands China unit. The Macau revival was highlighted as a contributing factor to the ratings outlook upgrade.
The casino giant’s credit profile is bolstered by the exceptional quality, popularity and prestige of its properties, in addition to its very robust credit metrics pre-pandemic and the positive long-term gaming demand trends in each of its markets, according to Moody’s. Q1 data showed that Sands was one of the concessionaires to grow its market share, in the mass, premium mass and VIP sectors.
Sands’ sound financials merit the outlook upgrade, with $6.3 billion in cash on hand plus access to a revolving credit facility of $2.5 billion. The operator suspended its dividend in 2020 to safeguard its funds during the pandemic’s peak, much to the disappointment of income investors expecting a steady dividend increase and a high yield. However, this has allowed Sands to preserve a major amount of money by eliminating that expense while reinforcing its balance sheet.
Moody’s noted that the business is generating positive adjusted property EBITDA, and that the company’s cash resources, assets value and the suspension of its dividend as its business has been affected, supports its liquidity and displays a readiness to preserve capital during challenging operational periods.
A credit upgrade is unlikely in the near future due to the slowly restoring operations of the company, but ratings improvement would demand that LVS achieve and retain gross debt/EBITDA on a Moody’s adjusted basis at 2.0x or lower, produce consistent positive revenue growth with a stable to higher EBITDA margin, and maintain sound reinvestment. Additionally, a downgrade could be triggered by a drop in liquidity, a longer than expected earnings recovery or a reversal in Macau’s recent successes, or a more general reduction in consumer cyclicality.
