Las Vegas Sands: Risk of Snake Eyes

Although its stock price is up over 800% since its March lows, Las Vegas Sands (LVS Quote) plans to raise up to $3.3 billion in a Hong Kong IPO listing of its Asian assets later this month.

While it has great potential upside from its properties in gambling territory Macau, there are still a number of risk factors facing the casino that could cause it to trip its debt covenants on its massive $12 billion in liabilities over the next 18 months. Because of those risks and lax corporate governance oversight, I've initiated a short position on the stock.

Risk 1: Losses will persist without a meaningful upturn in operating performance. Despite a surge in Macau-based profits and management claims of cutting $500 million in operating costs from the business, Sands still is losing money, and at an increased rate year-on-year. It lost over $1 billion in operating expenses in the recent quarter alone. The bet that bulls on the stock are making is that we've hit bottom and that rooms, banqueting and convention revenue will all come back. On the recent earnings call, management noted that Macau had done particularly well recently, partially because of increased traffic over the October Golden Week holiday. The company pointed out that Las Vegas room bookings were up for January and February. However, the likelihood of a continued soft market in Vegas (especially with MGM's(MGM Quote) new CityCenter dumping 5,000 new rooms on the strip next month) seems high, even with Macau. It appears reasonable to assume that losses will persist over the next two years, at a time when it's vital for LVS to navigate its way through its debt obligations.

Risk 2: Debt requirements will get tighter over the next year. Like its losses, Las Vegas Sands' debt and liabilities have increased over the last year. It had $12 billion in debt as of the end of September -- up 13% from a year ago. LVS's biggest risk in holding such a high amount of debt while losing money is meeting its debt covenants, which include tightening the allowed ratio between debt and EBITDA, currently at a ceiling of 6.5:1 for US-related debt. Management says it is now running a ratio of 5.78:1. Starting July 1 2010, the allowed ratio will drop to 6:1. Then, on January 1, 2011, it will drop again to 5.5:1 and stay there.