Mandalay debt downgraded

Thursday, June 29, 2000 | 10:57 a.m.

Moody's Investors Service on Wednesday downgraded the debt of Mandalay Resort Group of Las Vegas.

Moody's moved Mandalay's bank credit agreement rating to Ba1 from Baa3, its senior unsecured debt to Ba2 from Baa3, senior subordinated debt to Ba3 from Ba2 and commercial paper to not prime from prime-3, among other changes.

Moody's, which has been reviewing the debt since May 11, said the review is complete and the ratings outlook is stable for Mandalay.

The rating service said it downgraded the debt because of Mandalay's policy of using cash flow to buy back shares instead of paying off debt; and because of disappointing results at its $950 million Mandalay Bay resort on the south end of the Las Vegas Strip.

"Moody's believes that the company will likely resume stock purchases whenever its share price is considered to be undervalued ... this shift in financial policy increases the likelihood that leverage will remain at a high level for the rating category despite the expectation fo strengthening free cash flow," Moody's said.

"Mandalay Bay is ramping up more slowly than anticipated due in part to sluggish foot traffic into the property as a result of its location at the southern end of the Las Vegas Strip. Although management is taking action to improve results at Mandalay Bay, its lower than anticipated cash flow has resulted in leverage remaining higher than Moody's had anticipated and debt levels are likely to remain high," Moody's said.

"Mandalay Resort incurred considerable debt to finance several capital projects, including Mandalay Bay, over the past several years. Moody's expected free cash flow from these developments to be applied to reduce leverage to a more appropriate level for the rating category before new projects or significant share repurchases were undertaken," Moody's said.

Moody's noted Mandalay's capital spending needs are expected to be minimal during the next few years, meaning its borrowing needs likely will be minimal as well.