NEW YORK--(BUSINESS WIRE)--Fitch Ratings has upgraded MGM Resorts International's (MGM) and MGM China Holdings Ltd's (MGM China) IDRs to 'B+' from 'B' and 'BB' from 'BB-', respectively. Fitch has also upgraded MGM's senior secured credit facility to 'BB+/RR1' from 'BB/RR1', MGM's senior unsecured notes to 'BB/RR2' from 'B+/RR3' and MGM China's senior secured credit facility to 'BBB-' from 'BB+'. The Rating Outlook remains Positive.
MGM China's IDR continues to be notches up off MGM's IDR. MGM China's stand-alone credit profile is borderline investment grade; however, Fitch links MGM China's to MGM's IDR since the weaker MGM controls MGM China through its 51% stake. The notching reflects the restricted payment covenants at MGM China, which restrict distributions if leverage at MGM China is greater than 3.5x.
KEY RATING DRIVERS
Fitch's upgrade of MGM's IDR to 'B+' and the Positive Outlook reflect the company's strong performance on the Las Vegas Strip and in Macau as well as Fitch's longer-term positive outlooks for these markets. The rating actions take into account MGM's improving FCF profile bolstered by the company's declining interest expense and distributions from MGM China. The increased probability that MGM's $1.45 billion of 4.25% convertible notes will convert by April 2015 and the growing equity value of MGM's stake in CityCenter are also positively factored into the IDR.
These considerations plus MGM's $3.6 billion in available liquidity and demonstrated access to capital markets largely offset Fitch's concerns related to MGM near-term liquidity needs. MGM has a $5 billion development pipeline and $2.4 billion of maturities coming due through 2016 (excluding the convertible notes). Fitch estimates that MGM will need to access additional $1 billion - $1.5 billion in capital to meet its funding needs through 2016.
MGM's consolidated leverage adjusted for income attributable to minority interest has improved to manageable 6.7x for LTM period ending June 30, 2014 versus 7.4x and 8.1x for same periods in 2013 and 2012, respectively. The improvement is driven by EBITDA growth on the Las Vegas Strip (10% compounded annual growth rate since the 2012 LTM period) and in Macau (15% growth rate). Debt also declined to $12.9 billion as of June 30, 2014 from $13.9 billion two years ago with MGM using its domestic FCF and MGM China dividends to paydown debt.
Fitch projects MGM's leverage to continue to decline even as the company funds its $5 billion development pipeline including $2 billion in U.S. In Fitch's base case projection U.S. debt declines by $1.1 billion from June 30, 2014 through 2016. This incorporates $1.6 billion of cumulative FCF including Macau dividends and the conversion of $1.45 billion in notes to equity (about an 18% cushion in stock price relative to the conversion price). Consolidated leverage adjusted for minority interest income improves to 5x by year-end 2016, which is consistent with the lower-end of the 'BB' category given MGM's segment exposure.
In Fitch's projections growth on the Las Vegas Strip offsets the recent softness in Macau until 2016 when MGM's projects start to come online. Fitch's 2016 EBITDA forecast includes half a year of MGM Cotai ($660 million full year EBITDA estimated). Fitch estimates EBITDA for MGM National Harbor and MGM Springfield at roughly $240 million and $120 million, respectively. In 2017, the first full year of the projects being open, leverage could potentially decline to below 4x if the company remains committed to debt reduction.
Macau revenue trends have been under pressure over the past several months due the weakness in the VIP segment. Fitch believes the downturn is mainly driven by the corruption crackdown in China and expects the segment to stabilize by late 2014 or early 2015. The mass market, which accounted for 77% of MGM Macau's EBITDA in the second-quarter 2014, continues to grow and will be a stabilizing factor for MGM China's EBITDA in the interim.
LAS VEGAS OUTLOOK
Fitch remains positive on the Las Vegas Strip outlook, especially relative to other U.S. markets. Fitch projects that the market will manage midsingle-digit RevPAR and low single-digit gaming revenue and visitation growth over the next two to three years. Visitation and RevPAR in 2015 will face a difficult comparison as CONEXPO-CON/AGG convention cycles out of Las Vegas (nearly 130,000 attendees in 2014). However, MGM sounded optimistic on convention trends on their second-quarter 2014 conference call, citing that convention bookings for 2015 are up by double digits with improved rates.
Year-to-date through July 31, 2014, Strip-wide RevPAR is up 10% yoy, with 7% coming from rate increases. MGM's RevPAR growth is on par with the market growing 14% in first-quarter 2014 and 6% in the second quarter. The company's guidance for the third-quarter 2014 RevPAR growth is 5%. MGM's built-out convention space at Mandalay Bay will further increase its already-sizable exposure to convention business.
MACAU OUTLOOK
Fitch's 4% revenue growth for 2014 forecast incorporates the balance of the year's growth for mass, VIP and slots of +15%, - 15% and +5%, respectively. This equates to 3.5% monthly declines for the remainder of the year, which is consistent with the past two reported months. Fitch's assumptions take into account the smoking ban on the mass-market floors going into effect next month, lack of new supply and tough 2013 comparisons for the balance of the year (mass and VIP were up 44% and 18%, respectively, in fourth-quarter 2013).
The VIP segment has been pressured recently by tightening of junket credit and the corruption crackdown on the mainland. Fitch believes these pressures are temporary and expects VIP to turn back positive by early 2015 as year-over-year comparisons get easier and the aforementioned pressures subside, although the exact timing is hard to estimate. Fitch points to the weak temporary VIP trends in 2012, a year that coincided with the transition of power to Xi Jinping from Hu Jintao.
Fitch remains positive on the mass market side and expects monthly year-over-year revenue increases in the 10% - 20% range in this segment through first-half 2015, until Melco Crown and Galaxy complete their respective Cotai projects midyear. At that point Fitch expects acceleration in mass growth, which will largely depend on the number of table games these projects are allocated and ability to hire and train adequate number of dealers.
CITYCENTER A POSITIVE RATING DRIVER
Fitch views MGM's 50% stake in CityCenter as a credit positive for MGM as the JV is in position to start distributing cash. Fitch estimates run-rate annual discretionary FCF for CityCenter at approximately $217 million. The run-rate FCF incorporates $331 million of LTM EBITDA from resort operations for period ending June 30, 2014, $64 million of interest expense and $50 million of maintenance capex assumed.
Since refinancing its notes in October 2013 with the existing term loan B, CityCenter has been using cash flow to paydown debt. Leverage as of June 30, 2014 is 4.7x, which is low relative to the enterprise value. Assuming a 10x - 12x EV/EBITDA range (Cosmopolitan recently sold for 15x) the EV is $3.3 billion - $4.0 billion. Possible options to monetize MGM's equity in CityCenter include selling its stake to the other 50% owner (Infinity World) or paying special dividends after a recapitalization.
The stated options, assuming the recapitalization raises leverage to 7x, could yield MGM about $450 million- $1.2 billion. However, access to this contingent liquidity hinges on cooperation from Infinity World, which is entitled to the first $494 million of distributions made by CityCenter per the JV agreement. MGM is entitled to the next $494 million and then the distributions are made pro rata.
MGM remains liable for the CityCenter completion guarantee. MGM estimates the remaining liability including the Perini related litigation expenses at $128 million. This is net of $72 million of restricted cash CityCenter has to offset the liability.
DEVELOPMENT PIPELINE
MGM's $5 billion project pipeline is among the largest in the gaming industry. The $2.9 billion project in Macau is fully funded between cash on hand, projected FCF and $1.45 billion available on the revolver in Macau. In the U.S., MGM has not specified how it plans to fund the domestic projects but did indicate that it may prefer using its $1.2 billion revolver. MGM can also use unsecured notes to fund its domestic projects as the credit agreement permits $1 billion of additional unsecured borrowings.
Fitch would view project financing for the U.S. projects more favorably relative to the company using its corporate credit as this would reduce the liquidity risk at the corporate parent level. Longer-term the projects, particularly the one in Maryland, would enhance MGM's credit profile by diversifying the company away from the Las Vegas Strip. MGM started construction on the Maryland project this past summer and the Springfield project is pending the results of a referendum set for this November in Massachusetts. The referendum is an attempt by anti-gaming groups to repeal the state's gaming law.
Fitch views the Maryland project favorably from a return on investment (ROI) point of view, even after accounting for the increased $1.2 billion budget. Fitch estimates 14% - 20% ROI in Maryland. The high ROI reflects MGM's position as the closest casino to the D.C. area including the affluent Washington D.C. suburbs in Virginia. Fitch is less optimistic on the Springfield proposal considering the licensing and host community fees as well as a less attractive supply/demand dynamic. However, Fitch still estimates 9% - 15% ROI for the Massachusetts project, which is an acceptable ROI for a domestic gaming investment relative to the recent comparison set.
The company will also likely bid on a license in Japan if that jurisdiction passes an integrated resort bill. However, even if the bill passes in 2014, license bid winners may not be known until 2015 or 2016 and heavy funding needs would not start until the existing development pipeline is complete. MGM is not bidding for a license in New York.
ISSUE SPECIFIC RATINGS
The two notch upgrade of MGM's unsecured notes to 'BB/RR2' from 'B+/RR3' incorporates a change in EV/EBITDA multiples used by Fitch for MGM's Las Vegas assets. The multiples were revised to 8x - 9x range from 7x - 9x, which pushed the estimated recovery for the unsecured notes to 71%-90% range. The updated multiples better reflects the Las Vegas Strip trading multiples with the Cosmopolitan Las Vegas recently selling for about 15x EV/EBITDA and Treasure Island selling for 9x during the trough of the recession. The multiples remain conservative to account for uncertainty over the timing of a potential default.
The 'BBB-' rating on MGM China's credit facility recognizes the overcollateralization of the credit facility as MGM China is about 2.5x leveraged through the credit facility assuming a full draw on the revolver and there are no meaningful lien carveouts.
RATING SENSITIVITIES
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
--Consolidated leverage adjusted for minority interest income approaching 5x (FY15: 6.4x and FY16: 5.0x);
--Domestic discretionary FCF after MGM China dividends being above 5% of domestic debt (FY15: 6% and FY16: 8%);
--Reversal of negative revenue trends in Macau and continuation in positive or stable trends on the Las Vegas Strip.
--Continued commitment to improving balance sheet.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
--Consolidated leverage adjusted for minority interest income increasing above 7x for an extended period of time (8x through the development cycle) (FY15: 6.4x and FY16: 5.0x);
--Domestic discretionary FCF after MGM China dividends declining below 2% of domestic debt (FY15: 6% and FY16: 8%);
--Extended operating pressure in Macau and/or sharp reversal of improving trends on the Las Vegas Strip; and/or
--Greater uncertainty with respect to MGM's ability to refinance near-term maturities.
Fitch upgrades the following ratings:
MGM Resorts International
--IDR to 'B+' from 'B'; Outlook Positive
--Senior secured credit facility to 'BB+/RR1' from 'BB/RR1';
--Senior unsecured notes to 'BB/RR2' from 'B+/RR3;
--Convertible senior notes due 2015 to 'BB/RR2' from 'B+/RR3.
MGM China Holdings, Ltd and MGM Grand Paradise S. A. (co-borrowers)
--IDRs to 'BB' from 'BB-'; Outlook Positive;
--Senior secured credit facility to 'BBB-' from 'BB+' (includes $1.45 billion revolver and $550 million term loan).
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage' (May 28, 2014);
--'Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers' (Nov. 19, 2013);
--'U.S. Gaming Recovery Models - First-Quarter 2014' (July 24, 2014);
--'Fitch 50 (Structural Profiles of 50 Leveraged U.S. Credits)' (July 8, 2014);
--'U.S. Regional Gaming: Long-Term Headwinds Abound (A Study of Secular Trends in U.S. Regional Gaming)' (Jul. 21, 2014).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=721836
U.S. Gaming Recovery Models - First-Quarter 2014
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=753081
Fitch 50 (Structural Profiles of 50 Leveraged U.S. Credits)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=752040
U.S. Regional Gaming: Long-Term Headwinds Abound (A Study of Secular Trends in U.S. Regional Gaming)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=751939
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=882014
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