Family Foresight Hall of Shame: Sheldon Adelson

My Family Foresight Thought Experiment is not a completely hypothetical exercise: 

1)  In 2006 Sheldon Adelson and his wife established a foundation to fund medical research into life-threatening diseases, especially cancer, with an innovative and much-needed emphasis on scientific collaboration.  At the time Adelson, CEO and principal owner of Las Vegas Sands Corp, was the third richest person in the United States, with a fortune estimated by Forbes at $20.5 billion (it would grow to over $30 billion at its 2007 peak).

Medical research, especially cancer research at the cutting edge, is a multi-decade project.  Any assets set up to fund it should be invested with a matching time horizon. 

2)  In yesterday's post on endowments I wrote the following:

It raises the eternal question: What do you do when a high percentage of your yearly spending comes from income on an investment portfolio whose deliberate pursuit of high long-term returns almost always means it's subject to significant fluctuations in annual returns?

Answer one, unsexy though it may be, is to build in enough margin of safety in your annual consumption expenditures (including debt service from leverage!) that you can tolerate (downward) volatility in your annual income.

What's true of households is true of companies.  In 2005 Las Vegas Sands covered its interest expense obligations with pretax income by a ratio of 4.0x, a comfortable margin of safety.  Two years later, after a debt-fueled expansion of the company, that ratio had shrunk to 1.56x.

3)  The company's debt maturity schedule was admirably long-dated, with only about $260mm due before 2010, out of a total of $7+ billion.  But the devil is in the details.  From a company 8-K filed on November 6 [my emphasis in bold]:

   Commencing September 30, 2008, the U.S. senior secured credit facility and FF&E financings require our Las Vegas operations to comply with certain financial covenants, including to maintain a maximum leverage ratio of net debt, as defined, to trailing twelve-month adjusted earnings before interest, income taxes, depreciation and amortization, as defined (“Adjusted EBITDA”). In order to comply with the maximum leverage ratio as of December 31, 2008, and subsequent quarterly periods, we will need to (i) achieve increased levels of Adjusted EBITDA at our Las Vegas properties; (ii) decrease the rate of spending on our development projects; (iii) obtain additional financing at our parent company level, the proceeds from which could be used to reduce our Las Vegas operations’ net debt; (iv) elect to contribute up to $50.0 million of capital from cash on hand to our Las Vegas operations (such contribution having the effect of increasing Adjusted EBITDA by up to $50.0 million per quarter for purposes of calculating maximum leverage (the “EBITDA true-up”)); or in some cases (v) a combination thereof.

     As our Las Vegas properties did not achieve the levels of Adjusted EBITDA necessary to maintain compliance with the maximum leverage ratio for the quarterly period ending September 30, 2008, we completed a private placement of $475.0 million in convertible senior notes with our principal stockholder and his family and used a portion of the proceeds to exercise the EBITDA true-up provision. The convertible senior notes bear interest at 6.5% per annum, payable in quarterly installments, and mature on October 1, 2013, unless earlier converted or repurchased by us, with an initial conversion rate of 20.141 shares of common stock per $1,000 principal amount. Following any fundamental change, as defined in the agreement, that occurs prior to the maturity date, we will be required to make an offer to repurchase the convertible senior notes at 101% of the then outstanding principal amount. Our principal stockholder and his family were granted pre-emptive rights with respect to any future proposed issuance or sale by us of equity interests (including convertible or exchangeable securities), pursuant to which they will be able to purchase a portion of the offered equity interests based on their fully diluted common stock ownership in the Company. The EBITDA true-up, by itself, would not have been sufficient to maintain compliance with the maximum leverage ratio as of September 30, 2008. Accordingly, the entire proceeds from the offering were immediately contributed to LVSLLC to reduce the net debt of the parties to the domestic credit facilities in order to maintain compliance with the maximum leverage ratio for the quarterly period ending September 30, 2008.

     Based upon current Las Vegas operating estimates for the quarter ending December 31, 2008 and quarterly periods during 2009, as well as the fact that we have continued to fund our development projects outside of Las Vegas, in whole or in part, with borrowings under the U.S. senior secured credit facility, we expect the amount of our material domestic subsidiaries’ indebtedness will be beyond the level allowed under the maximum leverage ratio. If our Las Vegas Adjusted EBITDA levels do not increase sufficiently, we do not adjust spending on our global development projects, which we are currently evaluating, and the EBITDA true-up is not sufficient or available to enable us to maintain compliance under the maximum leverage ratio, we will need to obtain significant additional capital at the parent level. As previously announced, we are working with our financial advisor to develop and implement a capital raising program that would be sufficient to address our current and anticipated funding needs; however, no assurances can be given that the program will be successful. If none of the foregoing occurs, we would need to obtain waivers or amendments under our domestic credit facilities, and no assurances can be given that we will be able to obtain these waivers or amendments. If we are unable to obtain waivers or amendments if and when necessary, we would be in default under our domestic credit facilities, which would trigger cross-defaults under our airplane financings and convertible senior notes. If such defaults or cross-defaults were to occur and the respective lenders chose to accelerate the indebtedness outstanding under these agreements, it would result in a default under our senior notes. Any defaults or cross-defaults under these agreements would allow the lenders, in each case, to exercise their rights and remedies as defined under their respective agreements. If the lenders were to exercise their right to accelerate the indebtedness outstanding, there can be no assurance that we would be able to refinance any amounts that may become accelerated under such agreements. Under the terms of the U.S. senior secured credit facility, if a default or a material adverse change, as defined in the agreement, were to occur, it would preclude our domestic subsidiaries from accessing any available borrowings (including the $400.0 million under the Delayed Draw II Facility, which expires November 23, 2008, and $201.1 million under the Revolving Facility, which includes approximately $7.7 million committed to be funded by Lehman Brothers Commercial Paper Inc.). If the capital raising program is unsuccessful and we do not have access to the available borrowings under the U.S. senior secured credit facility, we would need to immediately suspend portions, if not all, of our ongoing global development projects and consider other alternatives. These factors raise a substantial doubt about our ability to continue as a going concern. The condensed consolidated financial statements for the quarterly period ended June 30, 2008, do not include any adjustments that might result from the outcome of this uncertainty.

4)  Sheldon Adelson is a million times the businessman I'll ever be, and given his philanthropy and his honorable decision to commit $1 billion of his own money to save his company (a huge chunk of his reduced net worth), he's a million times the mensch as well.  But in no way can he call himself the victim of this so-called "unprecedented" crisis.  In the final analysis, he put an empire of over $30 billion at the mercy of a single 12-month earnings covenant in a single credit agreement, with almost no margin of safety.  His foundation, and those who would benefit from it, have sufferred as a result.

Comments

[NateCarrFan]

I wouldn't say he's that great of a mensch - his profits come mainly from the population's ignorance of the Law of Large Numbers, rather than from creating anything useful.