NEW YORK--()--Fitch Ratings assigns a 'B-/RR4' rating to MGM Resort International's (MGM) proposed senior unsecured notes due 2020. The Rating Outlook is Stable. A full list of ratings follows at the end of this release.
The proceeds from the proposed issuance will be used to refinance existing debt and is the third-sizable unsecured issuance this year (issued $1.85 billion prior to this). Upon the closing of this transaction MGM should be able to address its maturities through all of 2013 and part of 2014. Fitch views these transactions plus MGM's improving free cash flow (FCF) prospects favorably, which may lead to positive rating action within the near term.
Pro forma for repayment of the 6.75% notes that mature September 2012 and the proposed issuance MGM has $1.7 billion in liquidity ($1.5 billion excluding non-extended revolver availability). MGM has $1.4 billion of maturities in 2013, including $750 million in 13% secured notes (secured by New York-New York and has pro rata security in Bellagio, MGM Grand and Mirage). There is $1.3 billion of debt maturing in 2014, half of which is comprised of 10.375% secured notes (Bellagio and Mirage).
MGM's refinancing transactions have been largely interest expense neutral to date. The notes issued previously in 2012 have a weighted average coupon of 8.15% and were used to refinance notes and loans with interest of around 7%. This negative differential was offset by MGM extending a large portion of its credit facility (about $1.1 billion extended that is outstanding) with interest 200 basis points lower relative to the non-extended facility. In 2013, MGM's 13% secured notes mature in November and 11.125% secured notes due 2017 become callable in May at 105.563. Fitch estimates that MGM can save $60 million-$70 million by refinancing these notes not counting savings MGM can realize by pledging additional assets to the credit facility (pricing is based on collateral coverage).
Fitch expects that core domestic operations will also continue to drive improvements in FCF, which is approximately $50 million for the latest 12-month (LTM) period ending June 30, 2012 for the domestic group. Las Vegas Strip represents 78% of MGM's wholly-owned property EBITDA for the LTM period ending June 30, 2012. Fitch believes the fundamental outlook for the LV Strip remains among the safest markets in the U.S. for the balance of 2012 and 2013, supported by minimal supply growth. Fitch is maintaining its outlook for 2% visitation growth this year, but revising its LV Strip gaming revenue outlook to +2-3%. Fitch currently expects visitation and revenue growth in 2013 to be similar to 2012.
The Las Vegas Strip recovery trajectory slowed materially in second-quarter and forward trends softened, as the shorter-term group/business segment (i.e. in the year, for the year) weakened. Visitation is up 1.9% year-to-date through July, in line with Fitch's initial forecast of +2%, while gaming revenues are up 3.2% on the LV Strip, slightly below our forecast of a 5% increase. Any upcoming decision by Fitch to take positive rating action would hinge on the Las Vegas recovery remaining in line with Fitch's base case scenario outlined above.
Fitch will also factor in MGM's expansion plans in Massachusetts, Maryland, Ontario and Macau when considering positive action. MGM announced development plans at National Harbor (right outside Washington DC) and in Springfield, MA with each development budgeted at $800 million. These projects are subject to MGM being awarded a license through a competitive bidding process in each market and the Maryland license needs to pass a referendum in November. In Toronto, MGM is proposing a $2 billion - $6 billion casino resort. However, Ontario Lottery and Gaming Corp's plans to revamp the province's gaming regulation, which may allow a casino in the Toronto area, are not yet finalized. MGM also has plans to develop a $2.5 billion casino resort on Cotai through its 51% owned MGM China.
Fitch believes that the Cotai project has a high probability of moving forward but the other three mentioned may or may not occur. When considering an upgrade, Fitch will try to assess the probability of these projects moving forward and will look for more clarity on MGM's funding plans for each. A heavy project pipeline that relies on considerable capital contributions from MGM's main restricted group would be viewed negatively and may forestall the positive rating momentum.
Credit concerns that will somewhat constrain upward potential in the ratings include MGM's high leverage, weak albeit improving FCF, and thin covenant cushion. These negative considerations leave MGM susceptible to a downturn on the Las Vegas Strip although with a 'B-' IDR there is some cushion for mild declines that are seen as temporary by Fitch. The domestic group's leverage as of June 30, 2012 is high at approximately 11x. Reported covenant EBITDA for LTM period ending June 30, 2012 is $1.3 billion relative to a covenant threshold of $1.20 for the period. The covenant steps up to $1.25 billion in March 2013 and $1.30 billion in June 2013. The Macau dividend received by the domestic group is counted in the covenant EBITDA, providing MGM a degree of flexibility with respect to the covenant.
Fitch currently rates MGM as follows:
--Senior secured notes due 2013, 2014, 2017, and 2020 'BB-/RR1';
--Senior credit facility 'B/RR3';
--Senior unsecured notes 'B-/RR4';
--Convertible senior notes due 2015 'B-/RR4';
--Senior subordinated notes 'CCC/RR6'.
Additional information is available at 'www.fitchratings.com'. The ratings above were unsolicited and have been provided by Fitch as a service to investors.
Applicable Criteria and Related Research:
--'U.S. Leveraged Finance Spotlight -- MGM Resorts International' (Feb. 1, 2012);
--'U.S. Gaming Recovery Analyses -- Second-Quarter 2012' (Sept. 12, 2012);
--'Fitch 50 -- Structural Profiles of 50 Leveraged Credits - Amended' (July 26, 2012);
--'2012 Outlook: Gaming - Market Exposure the Differentiating Factor' (Dec. 13, 2011);
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Parent and Subsidiary Rating Linkage (Aug. 8, 2012)';
--'Recovery Ratings and Notching Criteria for Non-financial Corporate Issuers' (Aug. 14, 2012);
--'Country-Specific Treatment of Recovery Ratings' (June 15, 2012).
Applicable Criteria and Related Research:
U.S. Leveraged Finance Spotlight -- MGM Resorts International
U.S. Gaming Recovery Models -- Second Quarter 2012
Fitch 50 -- Structural Profiles of 50 Leveraged Credits - Amended
2012 Outlook: Gaming -- Market Exposure the Differentiating Factor
Corporate Rating Methodology
Parent and Subsidiary Rating Linkage
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers
Country-Specific Treatment of Recovery Ratings