NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns a 'B+/RR3' rating to $500 million in MGM Resorts International's (MGM) proposed senior unsecured notes due 2020 and upgrades MGM's existing senior unsecured notes to 'B+/RR3' from 'B/RR4'. In addition, Fitch affirms MGM's Issuer Default Rating (IDR) at 'B' and MGM's senior secured credit facility at 'BB/RR1. Fitch also affirms MGM Grand Paradise S.A.'s (MGM Grand Paradise) and MGM China Holdings, Ltd's (MGM China; co-borrower) IDRs at 'BB-' and the Macau credit facility at 'BB+'. Ratings reflect moderate linkage between MGM and its financially stronger Macau subsidiaries. The Rating Outlook is Positive.
UNSECURED NOTES UPGRADE RATIONALE
The upgrade of MGM's unsecured notes reflects improved recovery prospects for the notes supported by MGM's substantial equity in MGM China and to lesser extent CityCenter and Fitch's expectation that MGM will continue to deleverage its balance sheet. The upgrade to 'B+/RR3' also recognizes the limit on secured debt vis-a-vis the notes' 15% consolidated net tangible asset (CNTA) test and the prospect of $1.5 billion in pari passu notes converting into equity in April 2015. (The conversion of the notes is not factored into Fitch's recovery model.)
IDR KEY RATING DRIVERS
The Positive Outlook on MGM's IDR continues to be supported by the company's improving financial profile and Fitch's favorable outlook for Macau and the Las Vegas Strip. MGM's financial profile is much improved since the recession and has benefitted substantially from the company's exposure to Macau and Las Vegas and the company's ability to refinance high-coupon debt with less costly debt as highlighted by the refinancing of the secured notes late 2012.
Fitch's base case leverage metrics for MGM through the projection horizon could support a 'B+' IDR; however, the financial profile remains somewhat tenuous when taking into account the risks associated with the company's potential development pipeline and that the projected improvement in the leverage metrics heavily relies on the assumption that the 4.25% convertible notes convert into equity in 2015.
Fitch calculates MGM's consolidated gross leverage (adjusted for income attributable to minority interest and distributions from non-consolidated subsidiary distributions) for LTM period ending Sept. 30, 2013 at 7.1x. In Fitch's base case, leverage declines to around 6x at year-end 2016 as the continued improvement in operating trends, partial year of MGM's Cotai casino EBITDA and the conversion of MGM's $1.5 billion in 4.25% convertible notes more than offset borrowings for the company's potential projects in Maryland and Massachusetts and its project in Macau.
MGM's consolidated liquidity is solid with available liquidity as of Sept. 30, 2013 of roughly $3.6 billion and discretionary FCF (gross of project capex and net of dividends to minority MGM China owners) at about $500 million for the LTM period. The domestic group's liquidity is also strong with available liquidity of approximately $1.3 billion and discretionary FCF forecasted by Fitch for 2014 of roughly $250 million.
An upgrade remains likely within the next 12 - 24 months when there will be more clarity on MGM's development plans in Maryland and Massachusetts. Fitch will view more favorably project financing with limited equity contributions by MGM and limited recourse to the domestic restricted group. Although the lack of these attributes would not necessarily prevent an upgrade. Other rating drivers Fitch will be monitoring with respect to the upgrade include the operating trends on the Las Vegas Strip and Macau; MGM's possible pursuit of a license in Japan; and MGM's posture with respect to shareholder friendly behavior.
Fitch believes that MGM will remain focused in the near-term on improving its balance sheet aside from pursuing the existing development pipeline and possibly bidding for a license in Japan. Examples of shareholder friendly actions over the next two to three years could include taking anti-dilutive measures in conjunction with the 4.25% convertible notes being converted into equity or issuing debt to buy the other half of CityCenter from Dubai World or engage in other M&A related activity.
DEVELOPMENT PIPELINE MANAGEABLE BUT RELATED UNCERTAINTY PRESSURES RATINGS
MGM's only authorized large scale development project is its $2.6 billion Cotai casino resort that is due to open early 2016. MGM spent $183 million on the project through Sept. 30, 2013 and in Macau has $1.45 billion undrawn revolver along with approximately $775 million in excess cash. The run-rate discretionary FCF in Macau is in excess of $700 million per year. Therefore, MGM China will have capacity to make dividends in excess of $600 million per year through the development cycle, which is consistent with the dividends paid over the past one to two years (roughly $420 million in 2012 and $650 million for the LTM period ending Sept. 30, 2013). MGM receives 51% of dividends paid by MGM China.
In the U.S., MGM's covenants and liquidity allow for flexibility with respect to funding the potential projects in Maryland and Massachusetts. MGM has about $1.3 billion in liquidity in its U.S. restricted group, which includes its $1.1 billion available on its $1.2 billion revolver. The credit agreement permits $1 billion of additional unsecured borrowings and investments are subject to the Available Amount, which includes Macau dividends, along with other baskets. MGM can also use its unused capacity under its $500 million maximum capital expenditures covenant towards investments.
MGM remains the only applicant for the western region Massachusetts license and could be the favorite to win the license in Prince's George's County, Maryland (there are two other bidders). Maryland's gaming regulator is scheduled to announce the winner on Dec. 20, 2013 and Massachusetts gaming commission plans to award a license for the state's western region by April 2014. The Maryland casino is budgeted at $925 million and will have other equity partners. Radio One, Inc., a media company, will invest $40 million into the Maryland project and MGM stated that it is seeking additional minority investment. In Massachusetts, MGM will own 99% of the $800 million project with a private local investor (Paul Picknelly) owning 1%.
Assuming the projects are project financed and 65% debt funded, equity commitment from MGM after accounting for investment by Radio One is approximately $560 million, which MGM could potentially fund solely using MGM China dividends. Fitch views these projects favorably in the long-term but in the near-term the equity contributions by MGM into these projects will inhibit its ability to paydown the debt at its main restricted group.
The company will also likely bid on a license in Japan if that jurisdiction passes an integrated resort bill in 2014; however, license winners may not be known until 2015 or 2016.
$1.45 BILLION IN CONVERTIBLE NOTES COULD CONVERT IN 2015
The 4.25% convertible notes, with $1.45 billion outstanding and an April 2015 maturity, represent MGM's most meaningful approaching maturity. MGM's 4.25% convertible notes with $1.45 billion outstanding represents nearly 40% of the upcoming maturities over the next three years and equates to more than 1x of the domestic group's leverage. The notes' conversion option is now in the money (stock trades at around $22 vs. $18.58 conversion price) and the notes can be converted three days from maturity, which is April 15, 2015.
At the time of issuance, MGM entered into capped call options covering $1.15 billion of the notes' face value with the strike price set at the conversion price and the cap set at $21.85. MGM paid $81 million for the capped call options in April 2010 when the stock was trading at around $14. Fitch estimates that the options' intrinsic value is roughly $200 million based on the capped call price. However, the increase in the value is offset by the fact that it would take roughly $1.35 billion to repurchase the shares if the convertibles were converted today.
The Restricted Payment definition in MGM's credit agreement excludes the exercise by MGM of the rights under derivative securities underlying the convertible debt. Therefore, Fitch believes MGM's covenants would permit company to issue new debt and use the proceeds to repurchase the converted shares associated with the capped calls purchased. However, Fitch's base case does not assume a repurchase of the converted shares. This assumption is based on the company's publicly articulated emphasis on deleveraging and the potential for the conversion of the notes reinforces the Positive Outlook.
POSITIVE OUTLOOK UNDERPINNED BY FAVORABLE MARKET EXPOSURE
Macau represents 34% of MGM's consolidated LTM property EBITDA for period ending Sept. 30, 2013 and Las Vegas Strip 53% with the Mississippi and Detroit making up most of the balance. MGM is capacity constrained in Macau but managed to outperform the market in 2013 with gross gaming revenue growing 19.8% year-to-date through November (based on sell-side research) compared to 18.7% for the entire market. The company achieved this in part by shifting capacity towards VIP while getting better yield on its mass tables by focusing more on the premium end of the business. In 2014, Fitch expects growth to be more driven by the mass market for MGM as the VIP capacity initiatives begin to anniversary (opened a VIP floor in Sept. 2012 and introduced new junkets in April 2013).
Macau gaming revenue growth for 2013 has outperformed Fitch's expectations. Fitch expects growth to moderate somewhat in 2014 but projects growth to remain robust (12% forecasted for the market). Growth will be supported by the growing Chinese economy (Fitch projects 7% annual GDP growth in 2014 - 2015); the improved infrastructure in and around Macau (e.g. new ferry terminal connecting to Cotai opening mid-2014); and the development on Hengqin Island adjacent to Macau. Fitch expects MGM to capture its fair share of the revenue growth since most other operators (with possible exception of Las Vegas Sands) face similar capacity constraint issues in 2014.
Fitch remains constructive on the Las Vegas Strip outlook, especially relative to other domestic markets. Fitch projects that the market will manage low-to-mid single-digit RevPAR and gaming revenue growth over the next two to three years. Fitch expects MGM to outperform the market on the RevPAR front given the company's exposure to convention business, which Fitch expects to be strong in 2014. Around 2016 - 2017, Genting Group could open Resorts World Las Vegas, a higher end Asian-themed integrated casino resort. This will add 3,500 rooms into the market and likely dampen Las Vegas' RevPAR momentum when it opens. Genting Group's property will likely compete with MGM for the high-end baccarat segment, but may also introduce more mid-tier Asian players into the market.
CITYCENTER NOW VIEWED AS A POSITIVE CREDIT DRIVER FOR MGM
Fitch now views CityCenter Holdings, LLC ('B' IDR; CityCenter) as an asset for MGM, which is change from when the Las Vegas Strip complex opened in late 2009. After two refinancings, sale of the bulk of the condo inventory and strong ramp up in core operations the 50/50 JV with Dubai World is now generating solid FCF and has a relatively strong balance sheet with leverage pro forma for recent refinancing at roughly 6x.
CityCenter is also in position that it can potentially start upstreaming cash to its JV partners (subject to covenants of the credit agreement) through regular dividends and/or by selling Crystals, its retail component. Fitch estimates run-rate FCF for CityCenter in the $150 million - $200 million range and Crystals selling for $530 million - $750 million applying 5% - 7% cap rate to the LTM EBITDA. There is some uncertainty with respect to MGM accessing cash at CityCenter in the near-term as the JV agreement with Dubai World stipulates that Dubai World receives the first $494 million in distributions from CityCenter.
MGM estimates its remaining net obligation with respect to its CityCenter completion guarantee at $82 million, which is manageable, and stated in its third-quarter filing that is not reasonably possible that the liabilities will exceed this amount. The $82 million net liability is $143 million in remaining settlement obligations related to the Pernini lawsuit estimated by MGM; plus related legal fees and minus $72 million in condo proceeds held at CityCenter that MGM is allowed to use to offset its completion guarantee.
LIQUIDITY AND FCF ARE MUCH IMPROVED; MATURITIES MANAGEABLE
Liquidity and FCF are solid and can support a higher IDR although few large maturities remain in 2015 - 2016. Pro forma for the refinancing of the 5.875% notes due 2014, maturities include $2.3 billion ($875 million without the convertible notes) in 2015 and $1.5 billion in 2016. The convertible notes have a good likelihood of converting as the stock is trading close to 20% above the conversion price. MGM's unsecured notes are not callable, which may explain the heavy near-term maturities relative to other gaming companies.
Fitch expects the refinancings over the next three years to be accretive to cash flow since the coupon rates on the bonds coming due are in the 6.625%-10% range (excluding the 4.25% convertible notes) compared to 5.25% pricing for the new 6.5 year bonds (will be issued at par).
Available liquidity is solid. MGM has approximately $3.6 billion of liquidity when including Macau and $1.3 billion just in the U.S. About $2.5 billion of the total liquidity is made up of $1.45 billion in revolver availability in Macau and $1.1 billion of revolver availability in the U.S.
Fitch forecasts 2014 FCF for the domestic group excluding dividends from unrestricted subsidiaries and project capex of about $250 million. This forecast includes estimated EBITDA net of cash-based corporate expenses of $1.29 billion (LTM EBITDA is $1.22 billion); $785 million in cash based interest expense (LTM cash based interest expense is about $920 million); and $250 million capex ($274 million in capex for the LTM period). Possible cash uses not included in the FCF forecast could be development capex in the U.S. (e.g. casino projects in Maryland and Massachusetts and the arena in Las Vegas) or the remaining CityCenter completion guarantee obligations. FCF forecast also does not include Macau dividends, which Fitch estimates at $600 million for 2014 (MGM would get $306 million of that).
MGM OWNERSHIP PRESSURES MACAU RATINGS
MGM Grand Paradise's and MGM China's 'BB-' IDRs take into account moderate linkage between MGM and the Macau subsidiaries, which potentially would have higher stand-alone IDRs. The linkage takes into account MGM Grand Paradise's liberal covenants with relaxed limitations on additional debt and capacity for unlimited restricted payments if leverage is less than 3.5x. The two notch differentiation reflects the maximum extent to which MGM Grand Paradise could support MGM, which is bound by the former's credit facility covenants.
The moderate linkage also takes into account MGM's 51% control of MGM China. There is a significant overlap between MGM China's (MGM Grand Paradise's publicly listed holding company) and MGM's boards, with six out of 12 MGM China board members (including Pansy Ho, who holds $300 million in MGM convertible bonds) having economic interest in MGM.
Also factored into the linkage is MGM Macau's dependence on MGM for branding and other services. As part of the MGM China IPO, MGM Grand Paradise entered into a brand licensing fee agreement with an entity 50/50 owned by MGM and Pansy Ho (MGM Branding and Development Holdings, Ltd) whereby MGM Grand Paradise pays 1.75% of gross revenue (subject to caps) to the entity for the privilege of using the "walking lion" and related trademarks. There is also a marketing agreement with MGM, whereby MGM gets a 2.7% - 3.0% of theoretical hold from referred patrons.
RECOVERY RATING ANALYSIS
MGM's equity in MGM China (51% owned by MGM) now accounts for $2.8 billion of the total $9.9 billion enterprise value Fitch calculates for MGM's recovery analysis. The $2.8 billion equity value incorporates a 10% stress on the LTM EBITDA and applies a 9x EV/EBITDA multiple to come up with $2.8 billion in equity value held by MGM. These assumptions are conservative when compared to the $6.8 billion value implied by the market cap of the Hong Kong listed MGM China.
In the second-quarter 2013 MGM used cash on hand, some of which came from Macau dividends, to meet a $462 million maturity of senior unsecured notes. Over the long-term Fitch expects MGM to continue to use FCF and Macau dividends to reduce the amount of unsecured notes outstanding although it is possible that MGM could fund part of its domestic development pipeline partially with corporate level unsecured debt.
Fitch calculates the recovery for MGM's unsecured notes at 53%, which is at the low end of the 51% - 70% range for 'RR3' recovery rating. The estimated recovery includes conservative assumptions including 7x - 8x EV/EBITDA multiples for MGM's Las Vegas assets and LTM EBITDA generally being stressed by 25%. The multiples range is below 9x sale multiple Treasure Island, a mid-scale property, sold for in early 2009 and the EBITDA stresses are consistent with the stress seen during the 2007 - 2009 recession.
For the purpose of calculating recovery Fitch assumes full draw on MGM's $1.2 billion revolver ($80 million outstanding as of Sept. 30, 2013) and assumes 10% of EV (excluding equity value in non-wholly owned properties) for administrative claims.
MGM's $4 billion credit facility, for which Fitch estimates full recovery, is secured by New York-New York and Gold Strike Tunica. The credit facility also has a lien of up to $3.35 billion on the Bellagio, MGM Grand and Mirage. MGM Grand Detroit is a co-borrower on the credit facility and secures $450 million outstanding on the term loan B.
RATING SENSITIVITIES
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
--Consolidated leverage (Fitch calculation is described above) remaining
at or below 7x;
--Domestic EBITDA keeping pace with the step-ups in
the minimum EBITDA covenant, which steps up by $50 million roughly every
six months until peaking at $1.4 billion in early 2017 (as of Sept. 30,
2013 the company reported covenant EBITDA was $1.26 billion relative to
a $1.05 billion threshold);
--Domestic group generating
discretionary FCF (excluding Macau dividends) of at least $200 million
although there is flexibility for FCF to be below that at times of
heavier 'maintenance' capex (e.g. New York-New York outdoor space;
Delano re-branding at Mandalay Bay, etc.);
--More clarity with
respect to the U.S. development pipeline with more limited capital
commitment from the U.S. restricted group being viewed more favorably
and/or
--Conversion of the 4.25% notes with MGM allowing most or
all of the new shares to remain outstanding (i.e. no or limited share
repurchase) or publicly articulated commitment by the company not to
buyback associated shares.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
--Consolidated leverage adjusted for Macau minority interest migrating
above 8.5x for an extended period of time;
--Greater uncertainty
with respect to MGM's ability to refinance near-term maturities; and/or
--Domestic
group generating discretionary FCF remaining roughly breakeven.
Fitch takes the following rating actions:
MGM Resorts International
--IDR affirmed at 'B', Rating Outlook
Positive
--Senior secured credit facility affirmed at 'BB/RR1';
--Senior
unsecured notes upgraded to 'B+/RR3' from 'B/RR4;
--Convertible
senior notes due 2015 upgraded to 'B+/RR3' from 'B/RR4'.
MGM China Holdings, Ltd and MGM Grand Paradise S. A. (co-borrowers)
--IDRs
affirmed at 'BB-', Rating Outlook Positive;
--Senior secured credit
facility affirmed at 'BB+' (includes $1.45 billion revolver and $550
million term loan).
Additional information is available at www.fitchratings.com.
Applicable Criteria and Related Research:
--'Fitch Rates MGM
Resorts' New $4B Credit Facility 'BB/RR1'; Affirms IDR at 'B'' (Jan. 3,
2013)
--'U.S. Leveraged Finance Spotlight -- MGM Resorts
International' (Feb. 1, 2012);
--'U.S. Gaming Recovery Models --
Second-Quarter 2013' (Aug. 21, 2013);
--'2014 Outlook: U.S. Gaming
(Deleveraging Potential)' (Dec. 16, 2013);
--'2014 Outlook: Asia
Pacific Gaming (Stable Despite Rising Competition)' (Dec. 16, 2013);
--'Fitch
50 -- Structural Profiles of 50 Leveraged Credits' (July 11, 2013);
--'Corporate
Rating Methodology: Including Short-Term Ratings and Parent and
Subsidiary Linkage' (Aug. 5, 2013);
--'Recovery Ratings and
Notching Criteria for Non-financial Corporate Issuers' (Nov. 19, 2013);
--'Country-Specific
Treatment of Recovery Ratings' (June 28, 2013).
Applicable Criteria and Related Research:
U.S. Leveraged Finance
Spotlight -- MGM Resorts International
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=666969
U.S.
Gaming Recovery Models -- Second-Quarter 2013
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=716935
2014
Outlook: U.S. Gaming (Deleveraging Potential)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=726622
Fitch
50 -- Structural Profiles of 50 Leveraged Credits
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=646322
Corporate
Rating Methodology: Including Short-Term Ratings and Parent and
Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139
Recovery
Ratings and Notching Criteria for Non-Financial Corporate Issuers
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=721836
Country-Specific
Treatment of Recovery Ratings
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=710859
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=812400
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