Fitch: Borgata Sale Positive for Boyd; Largely Neutral for MGM

NEW YORK--()--Boyd Gaming Corp.'s (BYD) sale of its 50% stake in Borgata to MGM Resorts International (MGM) is a positive for BYD, according to Fitch Ratings. The transaction is largely credit neutral for MGM and a slight positive for MGM's REIT, MGM Growth Properties, LLC (MGP).

Boyd will use approximately $600 million in cash proceeds from the sale to reduce debt. Fitch estimates BYD's pro forma net leverage will decline to 5.5x from 6.3x pro forma for BYD's purchase of casinos in the Las Vegas Locals market announced in April. Notwithstanding the Las Vegas transactions, net leverage was 5.9x as of March 31, 2016. Previously, Fitch only included BYD's share of Borgata's distributions ($17 million in the LTM period) in BYD's EBITDA when calculating leverage.

In March 2016, Fitch revised BYD's Outlook to Positive and stated that the agency could upgrade BYD's Issuer Default Rating (IDR) to 'B+' if BYD sustained leverage below 6x. The stated use of Borgata's sale proceeds for debt repayment (understandably after making $610 million of debt funded acquisitions) and the company's repeated publicly articulated commitment to reduce leverage below 5x increases the probability of an upgrade.

The transaction is also a positive for the recovery prospects of BYD's senior unsecured notes as Fitch previously did not give much credit for BYD's share in Borgata for the purpose of the recovery analysis. There is now an increased chance that Fitch will upgrade the unsecured notes' Recovery Rating (RR) to 'RR4' from 'RR5' when BYD consolidates Peninsula Gaming into its credit group.

For MGM, the transaction is largely neutral for the main credit group and is a slight credit positive for MGP. MGM's consolidated leverage metrics will remain largely unchanged. Operationally, the full ownership of Borgata will increase MGM's exposure to the volatile regulatory environment in New Jersey, where a vote to expand gaming in the state will be held this November. On the other hand, consolidating Borgata will allow MGM to plug a leading Northeast asset into its loyalty program, creating revenue synergy opportunities.

For MGP, the transaction helps to diversify the REIT away from Las Vegas and provides a creditor friendly template for further acquisitions. MGP's transaction agreement for Borgata's real property purchase stipulates a cap on debt that MGP may assume with the balance of consideration to be paid by MGP issuing operating partnership units to MGM. The cap references a 5.5x leverage threshold. MGP's conflicts committee also received a fairness opinion from a third-party advisor.

Placing an asset that could be impacted by an adverse regulatory event in a near future into a long-term lease structure is somewhat questionable. However, the initial rent coverage will be high at about 2.1x. Fitch also believes that Borgata could remain a leading casino resort in the Northeast even if gaming expands in the state.

Fitch currently rates MGM's Long-Term IDR 'BB'. Fitch does not have public ratings on MGP but views its credit profile as slightly stronger relative to MGM's main credit group. Fitch's positive view of MGP reflects certain ring fencing mechanisms at MGP (covenants and independent board member decisions on material transactions) and the seniority of the leases in MGM's capital structure. Considering the master lease structure, Fitch does not believe there is material risk of the leases being rejected in an event of an MGM bankruptcy.

Fitch currently rates the following as indicated:

Boyd Gaming Corp.

-- Long-Term IDR 'B'; Outlook Positive;

-- Senior secured credit 'BB/RR1';

-- Senior unsecured notes 'B-/RR5.

Marina District Finance Company, Inc.

-- Long-Term IDR 'B'; Outlook Stable;

-- Senior secured revolver 'BB/RR1';

-- Senior secured term loans due 2018 and 2023 'BB-/RR2'.

MGM Resorts International

-- Long-Term IDR 'BB'; Outlook Stable;

-- Senior secured credit facility 'BBB-/RR1';

-- Senior unsecured notes 'BB/RR3'.

Additional information is available at 'www.fitchratings.com'.

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Contacts

Fitch Ratings, Inc.
Primary Analyst
Alex Bumazhny, CFA, +1-212-908-9179
Senior Director
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Colin Mansfield, CFA, +1-212-908-0899
Associate Director
or
Media Relations, New York
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings, Inc.
Primary Analyst
Alex Bumazhny, CFA, +1-212-908-9179
Senior Director
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Colin Mansfield, CFA, +1-212-908-0899
Associate Director
or
Media Relations, New York
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com