MGM MIRAGE rating cut as outlook improves

Thursday, Sept. 4, 2003 | 11:05 a.m.

Las Vegas-based casino resort giant MGM MIRAGE today boosted its third-quarter profit forecast and said it has accelerated its repurchases of stock. The equity buyback move led Standard & Poor's to downgrade the company's credit rating to junk status.

The casino company announced today that strong advanced bookings at its Las Vegas properties has resulted in it adjusting its earnings-per-share forecast from 30 cents to 35 cents for the quarter.

The company also announced today that its board of directors authorized the acquisition of up to $100 million of its outstanding debt securities through open market purchase or through privately negotiated transactions and that $25 million of that already has been completed.

Following the announcement, the company's stock price this morning was $37.35 a share, up 43 cents from Wednesday.

The company, which has the MGM Grand, Bellagio and the Mirage among its Las Vegas holdings, also said today that it has repurchased 2.8 million shares of its common stock in the current quarter, leaving about 5.2 million shares remaining under current repurchase authorization.

The company's board authorized the repurchase of 10 million shares of stock in January.

The most recent purchases represent buying stock at an accelerated rate. It was the aggressiveness in the stock purchase as opposed to focusing more on extinguishing debt that prompted Standard & Poor's to downgrade the company, an MGM MIRAGE executive said today.

James Murren, president and chief financial officer for MGM MIRAGE, said the aggressiveness of the stock repurchase "shows our increased confidence in the tone of our business and increase in cash flow."

But Murren said credit-rating companies would prefer the company use the free cash flow to reduce debt to reduce leverage instead of purchasing stock.

"We understand the position Standard & Poor's has taken," Murren said. "and they have no beef with our operating performance."

The accelerated purchase of stock prompted the New York-based credit rating company to downgrade the company to BB+ from BBB-, below investment grade. The lower rating will make it more expensive for MGM MIRAGE to borrow money.

"The company has balanced share repurchases with debt reduction, having repaid $106 million in debt during the first six months of 2003," said Standard & Poor's credit analyst Craig Parmelee.

"However, the timing for reducing debt leverage has been extended beyond Standard & Poor's previous expectations," he said.

Falling below investment grade "is not something we like, but we have great rapport" with Standard & Poor's, said Murren, who added that the downgrade was anticipated by the company.

"We just feel that our stock is an extremely good investment at this time, that 2004 will be a better year than 2003 and we want to invest in that prediction," Murren said.

The credit downgrade shouldn't hurt MGM MIRAGE expansion projects since the company is controlled by billionaire Kirk Kerkorian, who has had no trouble in the past financing new casino resorts and multi-billion-dollar mergers.

The boost in the company's earnings-per-share forecast was generated by strong future bookings and was anticipated by analysts who follow the company.

"Our forward room bookings and overall trends continue to show strength," MGM MIRAGE chairman and chief executive Terry Lanni said in a statement. "Recognizing the upcoming strong event calendar led by the sold-out Sept. 13 De La Hoya-Mosley fight at the MGM Grand in Las Vegas, we remain mindful that potential volatility associated with high-end play could further impact our third-quarter results."

A consensus of analysts following the company had previously estimated earnings per share of 34 cents for the quarter.

Robin Farley, a gaming analyst with UBS Securities LLC, said MGM MIRAGE's improved bookings were expected.

In a report issued today, Farley said the company's bookings are "not surprising following the booking trends that Mandalay (Resort Group) reported on its fiscal second-quarter conference call earlier this week."

In her report, Farley said if stock repurchases continue near current price levels, they could add about 2 cents a share to her forecast for all of 2004. She said UBS is adjusting its price target to $32.50 a share from $31 based on 2004 cash-flow estimates.