Undaunted by skeptics, Goldman Sachs & Co. is about to plunge into the high-stakes world of casino financing.
The Wall Street titan is putting together a package of high-yield bonds and a bank loan, totaling $670 million, to fund construction of the Venetian Casino Resort, a huge project on the Las Vegas Strip.
Many observers say the project carries unusually high risks. The developer, Las Vegas Sands Inc., is locked in a labor dispute with casino workers, and the $1 billion project is based on profitability projections that are considered very aggressive.
In fact, as Goldman makes its first major foray into casino financing, the top lenders in the field are sitting the deal out.
"Goldman is going to learn a lot," said one analyst. "They're really going to have their eyes opened in the next six months to a year, and shouldn't underestimate the value of experience."
Few people, however, doubt the execution prowess of Goldman Sachs. The firm is the seventh largest underwriter of high-yield bonds this year, with issuance of $6.3 billion through Nov. 4, according to Securities Data Co.
Goldman and Bear, Stearns & Co. are expected to price a $500 million high-yield deal for Venetian Casino by the end of this week. The package includes $410 million worth of mortgage notes and $90 million of senior subordinated notes.
The mortgage notes are expected to price to yield 11.25%, while the senior subordinated notes are expected to price at 14%.
Meanwhile, Bank of Nova Scotia and Goldman are in the market with a $170 million bank loan for the project. That deal is expected to close next week.
Observers say that investors are bound to be hungry for the sizable casino deal. This will be the first project financing on the Las Vegas Strip since Stratosphere Corp. sold a $203 million issue of first mortgage notes in March of 1995.
Still, Goldman's first foray into the field carries clear risks.
"These projects either work big, or fail big," said gaming analyst Ray Cheeseman of Jefferies & Co. "If the project opens, with all of the amenities as described at the price described, the odds are it will make it."
However, he added, "between that day and today is an awful long period of time."
Goldman declined to comment on the deal. But some sources familiar with the effort expressed little concern about the risks.
"Goldman is going to get the deal done," one source said. 'It's just a matter of where to price it."
The Venetian, slated for completion in April 1999, is to be a two-tower, 3,036-room resort based on the theme of Renaissance Venice. Planned for the site of the former Sands Hotel & Casino, the resort is expected to cost about $1.05 billion to develop, equip, and open.
Sheldon Adelson, chairman of Las Vegas Sands, announced his plans for the project more than a year ago. Though financing details were not firmed up until August, Mr. Adelson began constructing the Venetian in April, putting in $90.3 million of his own cash.
The facility is to include a 116,000-square-foot casino, a 35-story hotel, seven restaurants, and 55 retail stores.
It also will have a meeting and conference center adjacent to the existing Sands Expo and convention center, the largest in the United States.
GMAC Commercial Mortgage Corp. is providing Mr. Adelson with a $140 million construction loan. Goldman Sachs Mortgage Co. has agreed to provide a $105 million takeout loan for the construction credit.
The leading lenders to the casino industry-Wells Fargo & Co., Societe Generale, and BankAmerica Corp.-declined to comment on the deal. So did Las Vegas Sands and its banks.
But critics of the project have a laundry list of concerns.
The first is Mr. Adelson's conflict with the Culinary Workers Union, which represents 40,000 casino workers in Las Vegas.
Traditionally, when casinos close, union workers are given preferential treatment for rehiring at new resorts. Only two out of the 47 casinos in Las Vegas are operated by non-union workers.
But when the original Sands Hotel and Casino closed, Mr. Adelson refused to rehire union workers. The Culinary Workers Union took him to task.
"With the amount of growth, this may be a limiting factor down the road," said one source familiar with the project.
"Treating people well is a very important part of the business," added Joe Coccimiglio, a gaming analyst with Prudential Securities. "It's another challenge, more than just getting the gaming business."
Another point of contention is Mr. Adelson's projections for the Venetian. His valuation of the land, at $5 million an acre, makes it one of the most highly valued properties on the Strip.
Mr. Adelson has also projected a 42.5% operating margin for the casino. That's well in excess of the 20% average margin for high-end Las Vegas casinos. The Mirage, for example, operates at 28%, while the MGM Grand operates at 30%. New York New York is operating at about 50%, experts said.
Average daily room rates have also caught flak. At $167, they're well below other convention center city hotels such as those in Chicago and San Fransisco, but still exceed the average Las Vegas room rate of $100.
"The projections he's made are difficult to meet," said John Maxwell, gaming analyst at Societe Generale Securities Corp. "The operating margins are highly aggressive, especially if he continues to have confrontations with the union."
Mr. Adelson purchased the Sands Hotel & Casino from MGM in 1989. He hired William Weidner, former president of Pratt Hotel Corp., to head the development and management of the project.
Before that, Mr. Adelson had five other management teams running the old Sands, which closed in 1996.
"The primary challenge will be the ability to generate adequate casino play from convention guests and achieve the cash room rates that management is expecting," said Standard & Poor's analyst Greg Zappin.
"The margin for error for the Venetian is small, as it is dependent on this single source of cash flow to service its heavy debt burden."
In its favor, observers said, the project has an excellent location, including proximity to the convention center.
"It will be a top tier facility, there's no doubt about it," said one source familiar with the deal.
But Mr. Cheeseman, the Jefferies analyst, said Goldman chose a "tough deal" for its first bet on the gaming industry.
"The biggest construction projects have been the biggest struggles, and it's a real challenge to do this purse," he said.
"Unfortunately, they happen to be coming to market after one of the biggest market corrections," he said. "There are deal challenges and market challenges to get over here. I wish them all the luck. I would rather see it work, but they've chosen a hard one to start out."
