Unfortunately The Casino Does Not Always Win
May 20 2013, 12:32 | about: MGM
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Between the Casino stocks that I have been covering recently with exposure to Macau, MGM Resorts International (MGM) is the company with the largest exposure to the Las Vegas Strip market. MGM Resorts is the largest gaming company in the Las Vegas Strip gaming and hotel market, its properties include approximately 30% of all rooms on the Strip. The majority of the company's revenue comes from the USA with MGM China currently contributing approximately 20% of the company's revenue and EBITDA.
MGM China is much safer from competition, because only six companies are licensed to operate in Macau (as discussed extensively in my articles about Las Vegas Sands (LVS) and Wynn Resorts Ltd. (WYNN) because they have comparatively large stakes on the island), effectively that grants the operation a solid economic moat for the foreseeable future.
MGM Resorts is a turnaround story after flirting with bankruptcy in the recent past. Trying to valuate the company I encountered several difficulties. At the heart of the matter is debt load. It's huge and for many investors, it's a turn-off and to many, it should be. Yet, I will spend considerable time examining it, because getting some insight into the debt load is necessary to get an idea about this investment prospect.
Under the destructive tenure of former MGM CEO Terry Lanni, who overpaid for acquisitions funded by leveraging the company, one of them the massive City Center project that nearly drove MGM into filing for Chapter 11, MGM's stock price was driven into the ground.
CEO Jim Murren who took over in December 2008 (after being COO since 2007) is halfway through turning the company around. Bankruptcy is not an immediate threat but the company is still significantly more levered than I think is ideal. This is the information the company gave about the issue in their Q1 2013 earnings report:
"We have significant outstanding debt and contractual obligations in addition to planned capital expenditures. We expect to meet our debt obligations and planned capital expenditure requirements with future anticipated operating cash flows, cash and cash equivalents, and available borrowings under our senior credit facility. Excluding MGM China, at March 31, 2013 we had $1.1 billion of principal amount of long-term debt maturing, and an estimated $826 million of cash interest payments based on current outstanding debt and applicable interest rates, within the next twelve months. At March 31, 2013, we had $13.7 billion of indebtedness, including $2.9 billion of borrowings outstanding under our $4.0 billion senior credit facility and $553 million outstanding under the $2.0 billion MGM China credit facility. On April 1, 2013, we used a portion of the cash balance to repay our $462 million 6.75% senior notes at maturity."
The senior credit facility is the crux of the matter. I apologize about the flood of dry material but I think it's important I quote the latest 10-Q because the company lays out how these loans are collateralized and what conditions are tied to the credit facility.
Senior credit facility.
At March 31, 2013, the Company's senior credit facility consisted of $1.2 billion of revolving loans, a $1.05 billion term loan A facility and a $1.75 billion term loan B facility. The revolving and term loan A facilities bear interest at LIBOR plus 3.00% and are subject to credit rating adjustments six months after the initial loan. The term loan B facility bears interest at LIBOR plus 3.25% with a LIBOR floor of 1.00%.
The revolving and term loan A facilities mature in December 2017 and the term loan B facility matures in December 2019. The term loan A and term loan B facilities are subject to scheduled amortization payments on the last day of each calendar quarter from and after March 31, 2013 in an amount equal to 0.25% of the original principal balance.
The Company permanently repaid $7 million in the first quarter of 2013 in accordance with the scheduled amortization. The Company had $1.05 billion of available borrowing capacity under its senior credit facility at March 31, 2013. At March 31, 2013, the interest rate on the term loan A was 3.28%, the interest rate on the term loan B was 4.25%, and the interest rate on the revolving loans was 3.18%.
The land and substantially all of the assets of MGM Grand Las Vegas, Bellagio and The Mirage secure up to $3.35 billion of obligations outstanding under the senior credit facility.
CLICK TO VIEW THE BALANCE OF THE REPORT AND VIEW THE GRAPHICS
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