Las Vegas Sands Hits Snake Eyes

November 6, 2008  

Shares of Las Vegas Sands are getting hit hard after the company evoked that dreaded phrase, “going concern,” in a regulatory filing. As in, it believes it will be in violation of certain debt covenants, which “raises substantial doubt about the company’s ability to continue as a going concern.”

The company, which is expected to issue earnings Friday or Monday (after a previous delay), didn’t exactly say just how far out of compliance its Las Vegas operations will be–just that it will exceed its “maximum leverage ratio covenant for the quarter ending December 31, 2008 and at subsequent quarterly measurement dates.”

Barbara Cappaert, credit analyst at KDP Investment Advisors, says it is impossible to know how out of compliance the gambling company will be without more-current financials. “A minor infraction could easily be negotiated away with a hefty fee,” she writes, downgrading the company’s senior notes to a “hold” rating. “A more moderate infraction could in fact become very costly to cure.”

The Las Vegas company was already in violation of these ratios for the third quarter, and it issued 5 million in convertible shares to Sheldon Adelson, the principal stockholder of the firm. But that wasn’t enough, so it needs to do one or all of the following: Earn more money, spend less money, get more financing from its parent company or contribute million of capital from its cash on hand to its Las Vegas operations. The latter two options seem more likely.

The stock was off 30%, and options activity was heavily skewed in favor of more bearish action. More than 17,000 November put options at a .50 strike price were traded, exceeding the existing 8,200 contracts, and more than 16,000 contracts at the strike price were traded, surpassing the existing 6,300 contracts. Implied volatility has soared, suggesting investors foresee more trouble for the stock in the next couple of weeks before the November options expire.

“It’s the type of activity you’d see if there were concerns about the short-term outlook,” says Frederic Ruffy, options strategist at Whatstrading.com.

The company also filed a shelf registration that would allow it to sell a variety of securities, including debt and equity, as it needs a lot of capital for planned developments in Macau. Standard & Poor’s cut the company’s ratings last week citing its capital needs, which only increases its borrowing costs.

Analysts at Susquehanna Financial Group put it pretty starkly, saying the stock is “either going to zero or it isn’t…if the funding issues are resolved, the stock should move higher. If not, it goes to zero.” They don’t believe the latter will happen, due to Mr. Adelson’s checkbook.