S&P affirms ratings of LV firms

David Strow

Wednesday, Feb. 6, 2002 | 11:14 a.m.

Rating agency Standard & Poor's affirmed the investment-grade credit ratings of three of Las Vegas' largest gaming operators Tuesday, citing expectations of a recovery in the companies' finances over the next 18 months.

MGM MIRAGE, Park Place Entertainment Corp. and Mandalay Resort Group were all placed on S&P's "CreditWatch" on Sept. 24, over concerns of a slowing economy and a post-Sept. 11 downturn in tourism. The move meant S&P was actively considering a credit downgrade of all four companies.

Last month, Moody's Investors Service took that step, reducing MGM MIRAGE and Park Place to "junk" status. Fitch IBCA followed on Monday, taking Park Place down from investment grade "BBB-minus" to junk rating "BB-plus."

"The (Park Place) downgrade reflects the reduced cash flow generated, principally at the company's Western region properties, as a result of the effects of Sept. 11 and the economic downturn and high leverage for the rating category," Fitch's downgrade report said. Fitch does not rate MGM MIRAGE.

But S&P will not follow the lead of Moody's and Fitch, at least not in the immediate future. The agency affirmed the "BBB-minus" corporate credit rating of MGM MIRAGE and Park Place. Also reaffirmed was the "BB-plus" rating of Mandalay Resort Group, which is the highest non-investment-grade rating.

Lower ratings can make it more difficult for a company to borrow money and can make debt more expensive by leading to increases in interest rates. Some bond funds also will shy away from junk-rated companies.

"The three affirmations reflect Standard & Poor's expectation that financial profiles will recover enough over the next 18 months to support existing ratings, given Standard & Poor's current outlook for the gaming sector," S&P analyst Craig Parmelee wrote.

Larry Klatzkin, gaming analyst for Jeffries & Co., said the S&P affirmation "definitely helps" MGM MIRAGE and Park Place.

"Some funds might not as willing (to invest in the companies' bonds), because they have junk on one side," Klatzkin said. "They're split rated, and it factors into the yield (the effective interest rate of bonds). But it would have been a lot more dramatic with both (S&P and Moody's)."

Mandalay's outlook was revised to "stable," but a "negative" outlook was retained for MGM MIRAGE and Park Place, leaving open the possibility of downgrades in the future. This outlook reflects "significantly weak" balance sheets for investment grade companies, but factors in the expectation of an improving business environment and efforts to pay down debt.

"Financial policy will be closely monitored, and there may be little room for industry performance below current expectations," Parmelee wrote.

Mandalay's stable outlook "reflects additional financial cushion for its rating and the expectation that operating performance will gradually improve as 2002 progresses," he wrote.

Though it was not on CreditWatch, Harrah's Entertainment Inc.'s outlook was revised from negative to stable. Reaffirmed was Harrah's BBB-minus rating.

"Harrah's fourth-quarter operating performance was stronger than anticipated, and Standard & Poor's expects that credit measures will remain supportive of current ratings over the intermediate term," Parmelee wrote.