NEW YORK--()--Fitch Ratings has affirmed MGM Resorts International's (MGM) Issuer Default Rating (IDR) at 'B-' and MGM Grand Paradise, S.A.'s (MGM Grand Paradise) IDR at 'B+'. Fitch also affirms all of MGM's and MGM Grand Paradise's transaction ratings, which are listed at the end of the release. The Rating Outlook is revised to Positive from Stable.
The Outlook revision to Positive reflects:
--Fitch's continued positive outlook on Las Vegas Strip fundamentals over the next couple of years, despite some recent demand weakness which has tempered the outlook somewhat;
--The ability of MGM China (51% owned by MGM, parent company of MGM Grand Paradise) to pay meaningful dividends supported by robust discretionary free cash flow (FCF), an anticipated increase in the Macau credit facility, and significant cash on hand;
--Favorable execution of capital market transactions in 2012, which improved the company's maturity profile without an adverse impact on interest expense;
--The opportunity to reduce interest costs through refinancing high-interest secured notes in 2013 and 2014.
The above considerations should improve MGM's credit profile in terms of liquidity, FCF and leverage to be more consistent with a 'B' IDR over the next several quarters. Given MGM's size, market exposure and expressed interest in improving its balance sheet, MGM's credit profile improvement could result in continued migration up the rating spectrum over the next few years. The pace and extent of the migration largely depends on management's willingness to support its credit profile while pursuing potential growth opportunities.
Credit concerns that constrain upward movement in the ratings in the near term include MGM's high leverage, weak albeit improving FCF, a maturity wall that remains formidable past 2014 and a thin cushion relative to its primary credit facility covenant. These negative considerations leave MGM's credit profile vulnerable to weak downside scenarios, as it remains highly sensitive to a downturn in the broader economy, the Las Vegas Strip, and/or capital market conditions.
An upgrade of MGM's IDR to 'B' could occur over the next several quarters if:
--The Las Vegas Strip recovery continues in-line with Fitch's base case;
--The company successfully executes refinancing transactions with respect to upcoming maturities of its high-coupon secured notes, resulting in significant interest cost reductions and maturity profile improvement;
--Any potential growth opportunity does not materially affect MGM's credit profile adversely.
Fitch anticipates improvement in the domestic group's FCF profile, continued Macau dividends, and/or the use of cash on hand to pay-down near-term maturities to aid MGM's de-leveraging. Fitch forecasts MGM's domestic leverage and consolidated leverage (adjusted for minority interest) to improve to around 10x and 7.5x by year-end 2013, respectively, and 8x and 7x by year-end 2014. This compares to domestic and consolidated leverage as of June 30, 2012 of roughly 10.8x and 8.1x, respectively. At the 'B-' IDR, MGM's FCF and ability to address upcoming maturities remain primary rating drivers, but leverage will become an increasingly important consideration in the ratings as the overall credit quality improves.
The reported covenant EBITDA for the LTM period ending June 30, 2012 is $1.3 billion relative to a covenant threshold of $1.20 billion 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.
Upcoming Maturities and Liquidity
MGM executed several transactions this year that improved the company's maturity profile without adversely affecting its interest burden, unlike other lower rated gaming issuers such as Caesars Entertainment Corp. (rated with an IDR of 'CCC'; Negative Outlook by Fitch) and Boyd Gaming (IDR of 'B'; Negative Outlook).
Pro forma for repayment of the 6.75% notes that matured in September 2012 and the September $1 billion note issuance, MGM's domestic restricted group has $2.0 billion in liquidity ($1.8 billion excluding non-extended revolver availability).
MGM has $1.4 billion of maturities in 2013, including $750 million in 13% New York-New York secured notes (notes also have pro rata security in Bellagio, MGM Grand and Mirage). There is $1.3 billion of debt maturing in 2014, half of which are the 10.375% Bellagio/Mirage secured notes.
In May 2013, MGM will be able to call its 10.125% secured notes due 2017 at a premium of 105.563, which could save the company approximately $15 million-$30 million assuming a 7%-9% coupon.
Refinancing maturities that are beyond 2015 are limited to $500 million as per credit agreement covenants but Fitch believes there is good chance that MGM will amend its credit facility sometime in 2013 or 2014 in conjunction with the maturity/refinance of the 2013-2017 secured notes. The collateral released by the paydown of the secured notes could be pledged to the credit facility in an effort to improve pricing.
Free Cash Flow
The domestic group's FCF for the LTM period ending June 30, 2012 was roughly negative $185 million, which includes $387 million of capex, the bulk of which is related to room remodels at Bellagio ($70 million) and MGM Grand ($160 million). Excluding these room remodels and including Macau dividends (which Fitch believes will be recurring), domestic LTM discretionary FCF is closer to positive $200 million (or breakeven without the dividends).
Fitch believes that MGM Grand Paradise has the ability to continue to pay meaningful dividends despite the planned Cotai development ($2.5 billion budget). Dividends will be supported by MGM Macau's robust discretionary FCF ($674 million for LTM period ending June 30, 2012), existing cash on hand (excess cash is around $500 million), and anticipated proceeds from a new upsized credit facility.
Domestic capex is expected to moderate somewhat but remain elevated as MGM announced a $40 million remodel at Bellagio's newer Spa Tower and a remodel of the rooms at THEhotel tower at Mandalay Bay. (The budget for THEhotel is undisclosed but Fitch estimates MGM spending at about $35 million-$40 million). Full-year 2012 domestic capex will be about $320 million and Fitch estimates 2013 domestic capex in the $250 million-$300 million range.
MGM's domestic FCF will also improve as a result of continued EBITDA recovery, which began about two years ago for MGM. About 78% of wholly-owned property EBITDA is generated on the Las Vegas Strip. Fitch expects domestic FCF to be breakeven to slightly positive in 2013 and improve to exceed $200 million starting 2014. Improvement in the outer years includes interest expense reductions largely stemming from maturities/refinancings of high-coupon secured notes in 2013 and 2014.
Las Vegas Outlook
Fitch believes the fundamental outlook for the Las Vegas Strip remains among the safest markets in the U.S. for the balance of 2012 and 2013, supported by minimal supply growth for the foreseeable future. With its recently completed/planned room remodels at Bellagio, MGM Grand and Mandalay Bay, MGM should benefit from the attractive supply/demand outlook on the Strip over the next couple of years.
The Las Vegas Strip recovery trajectory slowed materially in second quarter 2012, and forward trends softened as the shorter-term group/business segment (i.e. in the year, for the year) weakened. Visitation is up 1.8% year-to-date through August, while gaming revenues are up 2.6% on the Las VagasStrip. Fitch currently anticipates visitation and revenue growth in 2013 to be similar to 2012.
Potential Project Pipeline
Aside from MGM's Cotai project mentioned earlier, MGM is pursuing developments at National Harbor (right outside Washington DC) and in Springfield, MA, with each development budgeted at $800 million. In Toronto, MGM is proposing a multi-billion casino resort.
All of these projects have significant regulatory/licensing hurdles to overcome:
--In Massachusetts, the bidding process for the state's western-region gaming license is very contentious with at least four other bidders in the mix including Penn National Gaming, Ameristar Casinos, Mohegan Tribal Gaming Authority and Seminole Hard Rock Entertainment.
--Maryland (National Harbor) hinges on the recently passed legislation that would allow a casino in Prince George's County passing a referendum in November. Penn National Gaming, whose Charles Town, WV, racino would be negatively affected if the referendum passes, is allocating considerable resources to combat the measure.
--Ontario Lottery and Gaming Corp's plans to revamp the province's gaming regulations, which may allow a casino in the Toronto area. The city of Toronto is still contemplating whether it wants a major casino, and other parties expressed interest including Las Vegas Sands and Caesars.
Given MGM's somewhat constrained financial profile and restrictions imposed by the domestic credit agreement, Fitch believes that the projects outside of Macau will be done through project finance arrangements, possibly with other financial partners. However, there is a meaningful chance that MGM will refinance/amend its credit facility in the near term and include these projects in its main restricted group.
MGM Grand Paradise
Fitch views MGM Grand Paradise's stand-alone credit profile to be more consistent with a 'BB' category IDR but the 'B+' IDR reflects MGM's weaker credit profile, MGM's 51% ownership in MGM China (MGM Grand Paradise's holding company), and MGM's control with respect to MGM China's dividend policy.
There are no cross-default provisions between MGM and MGM Grand Paradise, but MGM has control with respect to MGM China's dividend policy. MGM Grand Paradise's current credit agreement permits the Macau subsidiary to pay unlimited dividends as long as gross leverage is less than 3.5x (current leverage is less than 1x) and permits more limited dividends if leverage is at or less than 4.0x. The 'B+' IDR reflects the risk that MGM Grand Paradise may opt to leverage up to 3.5x or higher to support the weaker parent company. These covenants may be revised, as the company is currently pursuing a new credit facility for MGM Grand Paradise.
The Positive Outlook on MGM Grand Paradise reflects MGM's improving credit profile, which reduces the risk that MGM Grand Paradise will be relied on to support the domestic credit group. If Fitch upgrades MGM's IDR to 'B', it will also upgrade MGM Grand Paradise to 'BB-', which is more in-line with MGM Grand Paradise's stand-alone credit profile. Fitch expected MGM Grand Paradise to seek a larger facility to accommodate its Cotai project and believes leverage will remain at or below 3x through the development cycle with ample capacity to upstream cash flow to MGM and minority shareholders.
MGM Grand Paradise's MGM Grand Macau property has fared relatively well over the last several months amid the slow-down in the market's VIP business, which is related to the broader China economic slowdown. MGM's Macau subsidiary reported a modest year-over-year EBITDA increase in second-quarter 2012 and, through September, MGM Grand Macau's market share remained steadily around 10% despite additional capacity coming on-line in April 2012 (i.e. Sands China's Cotai Central).
Fitch estimates full recovery in an event of default for MGM's secured notes resulting in a rating of 'BB-/RR1' and a three-notch positive differential relative to the 'B-' IDR.
MGM's credit facility is partially secured by Beau Rivage, Gold Strike Tunica, and the land on the Las Vegas Strip across from the Luxor. MGM Grand Detroit is a co-borrower on the credit facility and secured it to the extent it draws on the facility ($450 million as of June 30, 2012). Fitch estimates a recovery in 51%-70% range for the facility, which results in a 'B/RR3' and a one-notch positive differential relative to the 'B-' IDR.
Fitch estimates average recovery prospects in the 31%-50% range for the unsecured notes resulting in no notching from the 'B-' IDR.
Fitch expects that MGM's subordinate notes due 2013 will mature before any reasonable default scenario can occur, but assigns a 'CCC/RR6' (two-notch negative differential) to the notes to account for the notes' subordination.
There is a high probability that Fitch will upgrade the credit facility (and possibly the unsecured notes) as MGM's secured notes mature or are called, which would result in improved recovery prospects for the balance of the capital structure. Approximately $3.1 billion in notes secured by New York-New York, Bellagio, Mirage and MGM Grand become due or are callable by 2014.
Fitch estimates full recovery on MGM Grand Paradise's senior secured credit facility. The 'RR2' on the Macau credit facility reflects a two-notch soft cap for Macau issuers as stipulated by Fitch's criteria ('Country-Specific Treatment of Recovery Ratings', dated June 15, 2012).
Ratings being affirmed by Fitch are as follows:
MGM Resorts International
--IDR at 'B-';
--Senior secured notes due 2013, 2014, 2017, and 2020 at 'BB-/RR1';
--Senior credit facility at 'B/RR3';
--Senior unsecured notes at 'B-/RR4';
--Convertible senior notes due 2015 at 'B-/RR4';
--Senior subordinated notes at 'CCC/RR6'.
MGM Grand Paradise S. A.
--IDR at 'B+';
--Senior secured credit facility at 'BB/RR2'.
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 Models -- 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:
Country-Specific Treatment of Recovery Ratings
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers
Parent and Subsidiary Rating Linkage
Corporate Rating Methodology
2012 Outlook: Gaming -- Market Exposure the Differentiating Factor
Fitch 50 -- Structural Profiles of 50 Leveraged Credits - Amended
U.S. Gaming Recovery Models -- Second Quarter 2012
U.S. Leveraged Finance Spotlight -- MGM Resorts International