NEW YORK--()--Fitch Ratings assigns 'BB/RR2' to MGM Grand Paradise, S.A.'s (MGM Grand Paradise) $2 billion senior secured credit facility. Fitch also affirms the 'B+' Issuer Default Rating (IDR) on MGM Grand Paradise and 'B-' IDR on MGM Resorts International (MGM Resorts). In addition, Fitch assigns a 'B+' IDR to MGM China Holdings, Ltd (MGM China), MGM Grand Paradise's parent and co-borrower under the credit facility. A full list of rating actions is at the end of the release. The Rating Outlook is Positive on all three IDRs.
The credit facility consists of a $550 million term loan and $1.45 billion in revolver commitments, of which $500 million will be contingent on MGM Grand Paradise's Cotai land concession contract being published in the Official Gazette of Macau. Proceeds from the loan will be used to repay the amount outstanding on MGM Grand Paradise's prior term loan ($539 million outstanding as of Sept. 30, 2012) and to fund MGM's $2.5 billion Cotai project (MGM Cotai). The credit facility will mature in October 2017, with the term loan amortizing by $55 million to $82.5 million per quarter 15 months prior to the maturity resulting in a $165 million balloon payment at maturity.
The credit facility will be guaranteed by MGM China and MGM Grand Paradise and secured by MGM Grand Paradise's MGM Macau casino resort and the Cotai development project. A leverage maintenance test is set at 4.5 times (x) and steps down to 4.0x one year after the Cotai project opens. A minimum interest coverage test is set at 2.5x. Restricted payments are permitted as long as leverage remains below 3.5x and are limited to $300 million per rolling 12-months period if leverage is between 3.5x and 4.0x.
The new loan agreement does not have additional debt covenants, unlike the prior facility. However, additional pari passu liens are largely prohibited outside of some modest carveouts (e.g. $100 million for FF&E facility and capital leases). An interesting inclusion in the new agreement are the covenants pertaining to money laundering and bribery laws (including Foreign Corrupt Practices Act) whereby MGM China and its subsidiaries covenant that they will remain compliant with such laws. A breach of these covenants would constitute an event of default if not remedied within 30 days. (The company would not be in breach of these covenants if it is not aware that an associated person is engaging in activities that may violate these laws).
On Oct. 18, 2012, MGM announced that it accepted the terms and conditions of a land concession contract from the Macau government. The contract now has to be published in Macau's Official Gazette before MGM Grand Paradise starts the construction of its Cotai resort. Based on recent experience, this may take several months as it took roughly half-a-year for Wynn Resorts Ltd (Macau), S.A.'s (Wynn Macau) contract to be published in the Gazette after Wynn paid its land concession premium down payment in December 2011. Following the publication of the agreement, MGM Grand Paradise has 60 months to finish the project (plans to finish in 36) and has to pay a $161.4 million land premium composed of a $56 million down payment and eight additional semi-annual payments.
MGM Cotai will be developed on a 17.8 acre lot of land that is wedged between Sands Cotai Central (west of MGM Cotai), City of Dreams (north) and Wynn's Cotai site (east). The casino resort will have 1,600 hotel rooms and MGM plans to open up with 500 table games.
A primary risk factor is the potential for significant capacity to enter the market in a relatively short period of time. Including MGM Grand Paradise, all six concessionaires are looking to open a major casino project on Cotai by year-end 2016:
--Sands China and Wynn Macau have approvals in place to proceed with their respective projects which are estimated to cost roughly $3 billion and $4 billion, respectively.
--Galaxy Entertainment is proceeding with its $2 billion Galaxy Macau phase 2, which is expected to open by mid-2015 and nearly double the existing resort.
--SJM announced its land concession agreement a day after MGM announced its agreement with similar terms including a 60-months window to open the resort.
--Around that same time, Melco Crown announced that its 60% owned Studio City obtained $1.4 billion in delayed draw/revolving loan commitments to fund a $2 billion casino resort development and is expected to open by mid-2015.
Most of the Cotai projects are expected to open with roughly 500 table games except SJM's (announced 700 table games). This would suggest approximately 3,200 additional table games in Macau over the next three to four years relative to 5,497 table games as of Sept. 30, 2012, a 58% increase.
Table games are currently capped at 5,500 and Macau government has suggested that it will raise this cap at a rate of 3% per year over the next 10 years. Strict interpretations of these guidelines do not leave room for all of the projects to open with the planned table positions; however, operators seem confident that the table cap should not be a major issue. Additionally, existing tables may be re-allocated to new properties.
Another potential obstacle for the Cotai projects is the government's imposed limitation on foreign works. For construction labor, companies are allowed one foreign worker for every local one, which could prove challenging for the casino developers given Macau's 2% unemployment rate and ongoing transportation infrastructure developments in and around Macau (i.e. light rail). Staffing the projects once they are open could also be challenging as the current labor rules mandate that only locals can be employed as table dealers.
Fitch believes that for MGM to meet its 36 month development timeframe some foreign labor quota concessions by the Macau government would be required.
MGM Grand Paradise's IDR and Recovery Ratings
MGM Grand Paradise's 'B+' IDR reflects MGM's (IDR of 'B-') 51% ownership in MGM China and control with respect to MGM China's dividend policy. . The 'B+' IDR reflects the risk that MGM Grand Paradise may opt to leverage up to the maximum permitted under its covenants to support the weaker parent company. Fitch views MGM Grand Paradise's stand-alone credit profile to be more consistent with a 'BB' category IDR.
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 expects MGM Grand Paradise's gross leverage to remain at or below 3x through the Cotai development cycle with ample capacity to upstream cash flow to MGM and minority shareholders.
MGM Grand Paradise's strong discretionary free cash flow profile supports its credit profile, although much of the free cash flow (FCF) is likely to be upstreamed. Fitch projects discretionary FCF to exceed $600 million through the Cotai development cycle. For the LTM period ending Sept. 30, 2012, MGM China's EBITDA after branding fees is $677.5 million while maintenance capex and interest cost are expected to remain relatively benign as MGM Macau property is relatively young (opened December 2007) and the interest margin on the credit facility is accommodating (1.75% if leverage remains below 3x).
MGM Grand Paradise's MGM 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 healthy year-over-year EBITDA increases for the last two quarters ending Sept. 30 led by solid mass market/slots volume growth. Pre-branding fees EBITDA increased by 15% and 5% in the second and third quarter, respectively. Fitch believes that MGM China's EBITDA will be flat-to-slightly up over the coming quarters as weaker VIP business and additional capacity in the market (Cotai Central phase II opened in September) will largely offset continued growth in the mass market.
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).
What Could Trigger A Rating Action?
Positive - Future developments that may, individually or collectively, lead to positive rating actions include:
--Fitch's view of the attractive supply/demand outlook for the Las Vegas Strip remains intact;
--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.
Negative - Future developments that may, individually or collectively, lead to negative rating actions include:
--Broader economic pressure impacts Las Vegas visitation and consumer spending levels;
--Policy changes and/or economic slowdown in China that is more pronounced than Fitch's current outlook and/or adverse to the Macau gaming market;
--The capital market environment deteriorates such that the interest cost savings expected on refinancing transactions is materially reduced;
--MGM pursues and wins new market opportunities that leads to a reversal of the expected improvement in leverage, liquidity, and FCF.
Fitch takes the following rating actions:
MGM Resorts International
--IDR affirmed at 'B-';
--Senior secured notes due 2013, 2014, 2017, and 2020 affirmed at 'BB-/RR1';
--Senior credit facility affirmed at 'B/RR3';
--Senior unsecured notes affirmed at 'B-/RR4';
--Convertible senior notes due 2015 affirmed at 'B-/RR4';
--Senior subordinated notes affirmed at 'CCC/RR6'.
MGM China Holdings, Ltd and MGM Grand Paradise S. A. (co-borrowers)
--IDR of MGM China Holdings Ltd. assigned at 'B+';
--IDR of MGM Grand Paradise S. A. affirmed at 'B+'
--Senior secured credit facility rated 'BB/RR2' (includes $1.45 billion revolver and $550 million term loan).
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:
--'Fitch Revises Outlook on MGM Resorts and MGM Grand Paradise to Positive; Affirms All Ratings' (Oct. 11, 2012);
--'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' (Nov. 13, 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