Rating agency concerned about debt at Station, MGM MIRAGE

Thursday, Feb. 1, 2001 | 11:04 a.m.

Standard & Poor's issued negative credit reports on Station Casinos Inc. and MGM MIRAGE, citing concerns over potentially heavy debt loads incurred by the two Las Vegas companies' recent acquisition sprees.

S&P lowered its outlook on Station from "positive" to "stable." The agency reaffirmed its double-B corporate credit, double-B-plus secured bank loan and single-B-plus subordinated debt rating. A positive outlook indicates the possibility of credit rating upgrades in the future.

A triple-B rating is the lowest investment-grade credit rating. Double-B ratings and below are considered "junk bond" status. Generally, lower ratings result in higher interest rates when a company issues new debt.

S&P said the outlook downgrade reflects Station's "fairly aggressive financial policy and the expectation that Station is likely to operate with debt leverage that is higher that Standard & Poor's earlier expectations." The higher debt levels should be driven by renovations of Station's properties, S&P said, particularly at the newly acquired Santa Fe, Fiesta and Reserve hotel-casinos.

S&P also cited its expectation that Station will continue aggressive share buybacks.

"Station's leading position within the Las Vegas locals market and management's good operating and development track record should enable cash flow growth over the medium term," the S&P report said. "Although leverage could begin to decline again in 2002 as capital expenditures are reduced, the level of future development activity and share repurchases will continue to be important rating considerations."

S&P also issued an "A-3" short-term credit rating on MGM MIRAGE, related to the company's newly established commercial paper program. Commercial paper refers to short-term unsecured debt instruments that generally come due within 60 days of being issued. A-3 is equivalent to a triple-B rating.

S&P also reaffirmed its triple-B-minus long-term corporate credit rating on MGM MIRAGE, and its double-B-plus subordinated debt rating. It maintained its negative outlook on the company, issued when the company acquired Mirage Resorts Inc. in May for $6.4 billion.

While noting MGM MIRAGE had a portfolio of "high-quality, relatively new and well-located assets on the Las Vegas Strip," a strong operating performance, a strong management team and attractive long-term growth prospects, S&P expressed concern about the company's high debt levels, its concentration of assets on the Strip and potential capital spending on new projects starting in 2003.

"Despite the many positive attributes of the merger, MGM MIRAGE has added a significant amount of debt ... and is highly leveraged at the current rating level," the S&P report said. "Ratings could be lowered if debt balances are not (reduced) during 2001 and credit measures do not return to levels more consistent with a triple-B-minus rating."