The quicksand of Sands

November 8, 2008
Singapore Democrats

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Singapore Democrats

Just weeks after the Singapore authorities gave an upbeat report that the Integrated Resort Casino will create thousands of jobs, developer Las Vegas Sands (or as some wit cracked, Lost Wages Sands) reported that it is haemorrhaging cash and will likely file for bankruptcy.

Auditor PricewaterhouseCoopers has raised doubts that Sands is financially viable. The company’s share price plunged 32.7% to US$7.85 last Friday and its credit default spread is at 1804bp which indicates high risk.

The auditor also says that the gaming conglomerate will not be in compliance with maximum leverage ratio convenant for 4Q08. Filing for Chapter 11 bankruptcy protection is a distinct possibility.

Provided that IR Singapore can be shielded from its Las Vegas parent company and sold to another investor, it looks likely that the project will face a long and financially crippling delay. Negotiations for another backer will take many months and this has to take place before construction can recommence.

Given the current credit situation, where will such a buyer get additional funding bearing in mind that many mega-funded projects in the world have been put on hold since the tailend of 2007?

To make matters worse revenue for gaming resorts all over the world have declined, which is all a big worry for Singapore banks DBS, OCBC and UOB. They had led in extending a S$5.4b credit facility to Marina Bay Sands which makes them significantly exposed to the turmoil that is riling the parent company.

The total exposure of the three banks to the project is about $1.3b. It is understood that that about 50% of the S$5.4b has already been drawn down.

If Las Vegas Sands goes under, there are two possible scenarios: One, the consortium of banks gets another developer to take over the project. This looks improbable given that most international casino operators are already highly leveraged and unlikely to have the appetite to further expand into Singapore.

With the US economy tanking, Las Vegas gaming corporations are looking more to consolidate than expand their operations. And where they do venture overseas their main target is Macau, not Singapore.

Two, the Government throws open its doors to all and sundry in a desperate attempt to increase revenue. The entry levy for gamblers, currently pegged at $100/day or $2,000/year may be lowered or even done away.

The gaming area presently limited to less than 3 percent of the total floor area of the resort may be also increased. These adjustments will be aimed at making the project more appealing to potential investors.

Of course such a move will be a serious breach of promise that the Government made to Singaporeans when it pushed for the IR development. The social impact of the relaxed rules will be yet another cost to the Singaporean society.

A potential investor is, of course, Temasek or one of its subsidiary companies which are fiscally muscular enough to rescue the IR project.

But this is where in all gets a little, pardon the pun, dicey. The ruling party’s image will be severely dented if the casino plans fail. Politically, there is much at stake for the Government. There will be great temptation for the Government to throw money – taxpayers’ money – at the project to save face.

This is a perennial problem in a system where the nexus between corporations and politicians are as tight and opaque as it is in Singapore.

And there could be a double whammy here for Singaporeans. Even if the IR is successful in finding another investor, Las Vegas Sands will continue to be disadvantaged by the current global economic crisis and it will be stuck with the US$5b credit facility money it now owes. Mind you, the new investor is not obligated to ensure the banks recover their money.

Frighteningly, Singapore banks do not have to disclose precise exposures to individual customers due to banking secrecy laws here. The negative turn of events at Sands will no doubt hit share prices for all the three Singapore banks. Singaporeans will be left to carry the baby yet again.