NEW YORK--(BUSINESS WIRE)--Fitch Ratings has upgraded MGM Resort International's (MGM) Issuer Default Rating (IDR) to 'BB' from 'B+'; the Rating Outlook is Stable. Fitch upgraded MGM's senior secured credit facility to 'BBB-/RR1' from 'BB+/RR1' and affirmed its senior unsecured notes at 'BB/RR3'.
Fitch also affirmed the IDRs for MGM China Holdings, Ltd's and its co-borrower MGM Grand Paradise, S.A. (collectively MGM China) at 'BB' and their senior secured credit facility at 'BBB-/RR1'. MGM China's Rating Outlook is Stable.
KEY RATING DRIVERS
Fitch's upgrade of MGM's IDR to 'BB' reflects MGM's deleveraging toward the company's target of below 5x, which will occur by around 2017 per Fitch's revised forecast. This is an acceleration relative to Fitch's prior forecast, with the expected trajectory largely attributable to MGM's faster-than-expected implementation of its $300 million Profit Growth Plan, stronger than expected Las Vegas Strip trends, and the $540 million in proceeds from the sale of the Crystals mall. MGM said that it will use the Crystals sale proceeds along with $1.1 billion in MGM Growth Properties (MGP) IPO proceeds to reduce debt.
Fitch projects MGM's gross and net leverage to decline to 5.1x and 5.0x, respectively, by year-end 2017. Fitch calculated MGM's consolidated gross and net leverage as of March 31, 2016 at 6.3x and 5.7x.
Fitch believes that gross leverage of 5x is consistent with the higher end of the 'BB' IDR category for MGM given its high-quality and relatively diversified asset mix and Fitch's positive long-term outlook for the Las Vegas Strip. Fitch will monitor MGM's track record of adhering to its publicly articulated financial policies and the continuation of stable or improving operating fundamentals on the Las Vegas Strip before considering further positive rating action.
The upgrade takes into account the recent financings related to the formation of MGP, a newly formed REIT. Fitch views the creation of MGP largely as a credit-neutral event for MGM creditors. The net reduction in consolidated debt resulting from the MGP IPO offsets Fitch's concerns over MGM not directly owning the 10 assets contributed to MGP, MGM's more complex corporate structure, and the portion of MGP's dividends that will be paid to MGP's public shareholders (Fitch estimates about $100 million per year). The event is largely leverage neutral for MGM, both on a consolidated basis after accounting for dividends paid to minority holders and on an MGM credit group standalone basis when adjusting for the new lease obligation. (Fitch subtracts dividends to minority holders from EBITDA when calculating leverage for MGM.) Positively, MGM's transactions improved the company's liquidity by refinancing 2016 maturities and the bulk of the 2017 maturities and by extending its revolver to 2021 from 2017.
DEVELOPMENT PIPELINE
Fitch views MGM's development pipeline favorably, especially MGM National Harbor scheduled to open December 2016. Fitch estimates $240 million in EBITDA for MGM National Harbor, a solid 18% return on a $1.3 billion investment. The project will benefit from being the closest casino to Washington DC and its affluent Virginia suburbs.
MGM is also developing an $865 million MGM Springfield, due to open late 2018. The return on investment (ROI) prospects for Springfield are less certain given the Connecticut tribes' effort to build a casino that would cut off the Hartford traffic going north to Springfield, MA. (Fitch's forecast assumes that a third of the revenues will originate from the Hartford area.) Even without the new Connecticut casino, MGM Springfield's ROI will be negatively affected by host and surrounding community fees and the less affluent demographics compared to the areas closer to Boston. Without the Connecticut casino, Fitch estimates about $110 million of EBITDA for MGM Springfield, a 13% ROI.
MGP has the right of first offer for MGM National Harbor and MGM Springfield.
The $3 billion MGM Cotai development, part of the 51% owned MGM China, is scheduled to open in first quarter 2017 (1Q17). Fitch estimates the project will generate $100 million - $150 million of incremental EBITDA for MGM China after taking into account cannibalization of the existing operations from MGM Cotai and the competing projects coming online in 2016 and 2017.
MARKET OUTLOOKS
Fitch has a favorable long-term view for the Las Vegas Strip (60% of consolidated revenues) and Macau (23% of revenues) and a lackluster view for U.S. regional markets, which we believe are secularly challenged. Despite our somewhat negative view on the regional markets, MGM's regional assets tend to be in less competitive markets (e.g. Detroit and National Harbor) and/or are market leaders (e.g. Beau Rivage). MGM's assets also feature a heavy mix of non-gaming amenities, which we think positions the assets well against the prevailing consumer preferences.
In Las Vegas we expect the growing convention business, increasing air capacity and lack of new supply to drive RevPAR higher in the near term. MGM's 50% owned T-Mobile arena (opened in April 2016) and new convention capacity at Mandalay Bay and Aria will at least in part counterbalance the center of gravity moving more north after the next wave of projects open sometime around 2019. At the north-end of the Strip, Crown, Genting and Wynn are contemplating expansions geared towards the higher end. We expect these expansions to be mild negatives for MGM, whose resorts are clustered to the south. But we expect that the market, which will not see meaningful new capacity for a decade by then, to absorb the new projects without major disruptions to the existing operators.
Fitch forecasts negative 5% market-wide gaming revenue growth in Macau for 2016, which assumes modest sequential growth in the mass market and leaves room for continued, but milder weakness in the VIP segment. We expect a more significant decline in MGM's revenues in 2016 after taking into account cannibalization from the Parisian and Wynn Palace, both scheduled to open in 2H16. Past 2016, Fitch expects mid-single-digit growth in Macau led by China's rising middle class, the new capacity in Macau and infrastructure projects in and around Macau.
ISSUE-SPECIFIC RATINGS
MGM's $1.5 billion credit facility's issue-specific rating of 'BBB-/RR1' reflects Fitch's view that the facility is well overcollateralized by the pledged assets, Bellagio and MGM Grand Las Vegas. Additional secured debt is limited by the credit agreement's limit on incremental facilities (limited to 2.5x of net first-lien debt) and by the unsecured notes' 15% consolidated net tangible asset (CNTA) test.
Pro forma for the MGP transactions, recovery prospects for MGM's unsecured notes remain strong. We did not upgrade the notes because Fitch tends to compress the notching around the IDR as issuers credit improves.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for MGM include:
--Same-store domestic revenues grow about 2%-3% per year on average (0% across regional properties and up to 4% at properties with high exposure to convention business);
--EBITDA margins improving to 28% from 26%. The improvement is the result of the revenue growth flow-through and gives some credit to MGM's $300 million Profit Growth Plan;
--MGM China generating about $600 million of EBITDA in 2017, which factors in about $200 million EBITDA at MGM Cotai and approximately 20% EBITDA decline at MGM Macau;
--Approximately $240 million EBITDA at MGM National Harbor in 2017 and $110 million EBITDA at MGM Springfield in 2019;
--MGM does not pay a parent-level dividend through Fitch's forecast horizon (through 2019) and uses free cash flow (FCF) to fund project capex and maturities.
RATING SENSITIVITIES
MGM's IDR may be upgraded to 'BB+' if Fitch gains more confidence that MGM will reach and adhere to its leverage target of less than 5x. Stabilization of operating performance in Macau, continuation of the stable or positive trends in Las Vegas, and MGM's capital allocation policies with respect to returning value to shareholders will be factors considered by Fitch when contemplating further positive rating actions.
Fitch may revise MGM's Outlook to Negative or downgrade MGM's IDR to 'BB-' if leverage sustains at above 6x for an extended period of time past 2017, due to potentially weaker than expected operating performance, debt funding a new large-scale project or acquisition, or taking a more aggressive posture with respect to financial policy.
Fitch links MGM China's IDR to MGM's given MGM's strengthened credit profile and MGM China's strategic importance to MGM. Therefore, Fitch may upgrade MGM China's IDR to 'BB+' if and when Fitch upgrades MGM's IDR to 'BB+'.
LIQUIDITY
MGM's liquidity is now strong, a stark contrast to the years following the recession when liquidity was a primary credit consideration for MGM. Following the recent transactions, MGM's pro forma domestic liquidity covers needs through 2018 by 1.9x.
2Q16-4Q18 Sources:
--Cash excess of cage cash: $870 million
--Revolver availability: $1.25 billion
--Crystals sale proceeds: $540 million
--Cumulative discretionary FCF (includes MGP): $2.1 billion
--Dividends from MGM China and unconsolidated affiliates: $640 million
--Total sources: $5.4 billion
2Q16-4Q18 Uses:
--Maturities: $1.2 billion
--MGM National Harbor project capex: $600 million
--MGM Springfield project capex: $800 million
--Distributions to MGP's minority holder: $275 million
--Total uses: $2.9 billion
MGM China's liquidity is also strong with MGM Cotai being fully funded with an undrawn $1.45 billion revolver.
FULL LIST OF RATING ACTIONS
MGM Resorts International
--IDR upgraded to 'BB' from 'B+'; Outlook Stable;
--Senior secured credit facility upgraded to 'BBB-/RR1' from 'BB+/RR1;
--Senior unsecured notes affirmed at 'BB/RR3' (Recovery Rating revised from 'RR2').
MGM China Holdings, Ltd (and MGM Grand Paradise, S.A. as co-borrower)
--IDR affirmed at 'BB'; Stable Outlook;
--Senior secured credit facility affirmed at 'BBB-/RR1'.
Additional information is available on www.fitchratings.com
SUMMARY OF FINANCIAL STATEMENTS ADJUSTMENTS
-Leverage: Fitch subtracts distributions to minority holders of non-wholly owned consolidated subsidiaries from EBITDA for calculating leverage.
Applicable Criteria
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers (pub. 05 Apr 2016)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=879564
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1004275
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1004275
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https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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