Tuesday, November 11, 2008

Analysts Keen To Cast CapitaLand As White Knight

Source : The Business Times, November 11, 2008

There is also talk that Temasek could take stake

CapitaLand is trying hard to play down expectations but in the eyes of some analysts, it has emerged as the frontrunner in the race to become Las Vegas Sands' (LVS) white knight. The fact that CapitaLand had participated in the Request for Proposal for both integrated resort (IR) sites here is fanning such talk further.

A report by CIMB yesterday pointed out that few casino operators will have the 'financial muscle' to participate in the project, given that it expects the capital expenditure to be around $6.8 billion to $7 billion. 'If this is the case, we estimate that any new equity partner - including CapitaLand - would need to set aside $1.3 billion to $1.5 billion of development funds while taking on the $5.44 billion of debt that has been arranged with banks,' CIMB added.

As at Q308, CapitaLand has a net gearing ratio of 0.5 and a cash balance of $4.2 billion. It also has a dedicated integrated, leisure, entertainment and conventions business arm.

Given the size of the development, CIMB said that it believes that a viable option could be a 49:51 joint venture between the government and CapitaLand, with the latter taking a controlling stake.

However, CIMB also added that the sheer size of the project could be a 'strain' even for CapitaLand.

Talk is also that Temasek, representing the government, could take stake. While there is no evidence of this, Bloomberg reported that according to JPMorgan Chase data, five-year credit-default swaps on Temasek, which manages about US$130 billion, advanced 15 basis points to 113 last Friday. Bloomberg said that the price, which climbs as perceptions of credit quality deteriorate, is equivalent to US$113,000 annually to protect US$10 million of bonds.

CapitaLand has denied taking an equity stake. 'CapitaLand wishes to clarify that no discussion has transpired between itself and Sands,' it said in a statement released yesterday.

But CapitaLand added that 'in the present continuing global recessionary environment, (CapitaLand) is strategically watching the situation and studying opportunities related to distressed companies or assets, in Singapore and other core markets, that will have a strategic fit with its core business areas'.

Back in 2006, when the MGM-CapitaLand consortium lost the bid for the IR, CapitaLand chief executive Liew Mun Leong described the race as the 'mother of all competition' and the consortium's defeat as 'grossly disappointing and painful'.

He admitted that the company had made a 'killer mistake' in its bid with MGM Mirage - failing to give a higher priority to MICE (meetings, incentives, conventions and exhibitions), focusing instead on entertainment, retail, and food and beverage.

Still, what MGM Mirage chief Terrence Lanni said then seems to have come to pass. He said that of the four contenders, his company and CapitaLand would prove the least risky, owing to the depth of their experience and abilities.

'When you're going to do something like this and you're trying something new, you want to get rid of all the imponderables that you possibly can. I think there's less risk with us.'

Talk of LVS possibly filing for Chapter 11 bankruptcy protection reached fever pitch last week when it said in a filing with the US Securities and Exchange Commission that it did not expect to comply with its maximum leverage ratio convenant for the fourth quarter and possibly even for the following quarters.

If LVS does default, its lenders could bring financing maturity dates forward.

According to CIMB, Singapore banks UOB, DBS and OCBC remain most exposed to mortgage-backed securities (MBS), totalling over $2.2 billion. Citigroup, Maybank and Standard Chartered have credit exposures of $262 million each while Sumitomo Mitsui and RBS are $240 million and $226 million exposed, respectively. Goldman Sachs, Lehman Brothers and Calyon have exposures of $160 million each and Merrill Lynch and Bank of Nova Scotia have exposures of $100 million and $93 million each, respectively.

To comply with the maximum leverage ratio convenant, LVS will need to reduce spending, obtain additional financing or increase adjusted earnings before interest, tax, depreciation and amortisation (Ebitda) at its Las Vegas properties which can be achieved by contributing up to $50 million of capital from cash for the quarter.

Genting International's Resorts World Sentosa (RWS) will not have these problems. CIMB said that parent Genting Group's subsidiary Resorts World has net cash in excess of US$1.2 billion. CIMB said that Genting International has also fully contributed the entire $2 billion equity portion of the project and the $4.3 billion syndicated loan is in place.

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