LVS Term Loan Tells the Story

The 8-K Las Vegas Sands (LVS - commentary - Cramer's Take) filed contains standard language regarding possible default if LVS can't get in compliance with its maximum-leverage covenant (requires maximum leverage of 7.5 TIMES at Dec 31, 2008).

The language in itself is not a big deal, and the stock move is an overreaction based purely on the 8-K because this is NOT new news ... it was already known that LVS needed to raise equity and/or get a waiver from the banks to remain in compliance with this leverage covenant. However, if LVS lenders do accelerate, LVS stock is worthless.

The LVS term loan is currently down 1 point on this news to roughly 58 cents on the dollar, but is still well above its low of 52 in late October. LVS unsecured credit default swaps are trading at 45 points upfront (up from 37 points upfront). Recovery values on the loan in a default scenario are tricky because no one knows what EBITDA multiple is appropriate on a Las Vegas strip property. (Harrah's was bought for 11 times EBITDA in 2007, but current multiples are probably closer to 6-7 times EBITDA.)

If lenders actually planned to accelerate and push LVS into default, this term loan would probably be trading much lower because at 6 times EBITDA, recovery would be around 50 cents on the dollar. I think it is much more likely that lenders will grant a waiver if LVS is not able to secure financing to remain in compliance, rather than accelerate and force LVS into bankruptcy.

But either way, I would avoid the stock completely. MGM (MGM - commentary - Cramer's Take) and Penn National Gaming (PENN - commentary - Cramer's Take) stocks are much safer and cheaper ways to play gaming right now. MGM trades 9 times EV/EBITDA and Penn trades at 6.5 times EV/EBITDA. PENN has over $1 billion in cash from Centerbridge/Fortress after the LBO fell apart, and MGM has recently solved its 2009 maturity problem by issuing 13% bonds last week.

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At the time of publication, Dorman had no positions in the stocks mentioned.

Dorman has traded in the U.S. corporate bond market for more than severn years; for the last three years, he's worked as a high-yield and distressed corporate bond trader for Merrill Lynch. Prior to Merrill Lynch, Dorman worked as a credit analyst/trader on a distressed prop desk for Friedman Billings Ramsey and as an investment banker and capital markets analyst for Lehman Brothers.

Dorman graduated from Washington University in St. Louis in 2001 with a bachelor's degree in economics and finance and a minor in biology. Dorman played varsity baseball and football for Washington University.