CityCenter deal sends MGM Mirage stock soaring

Analyst: Deal on CityCenter and waivers from lenders ‘a major win for MGM’

Steve Marcus

The CityCenter project on the Las Vegas Strip.

By Steve Green (contact)

Published Thursday, April 30, 2009 | 8:31 a.m.

Updated Thursday, April 30, 2009 | 3:21 p.m.

Headlines from the Vegas gaming industry

CityCenter deal sends MGM Mirage stock soaring (4-30-09)
MGM Mirage, Dubai World working on CityCenter funding plan (4-17-09)
Report: MGM, Dubai World reach deal on CityCenter (4-17-09)
Report: Icahn, equity fund push for MGM bankruptcy (4-16-09)
MGM Mirage gets waiver for $70M CityCenter payment (4-13-09)
Dubai World wants assurance of CityCenter funding (4-10-09)
MGM Mirage stock surges on corporate financing news (4-6-09)
MGM Mirage hires investment firm (4-4-09)
Australian businessman weighing CityCenter investment (4-3-09)
CityCenter contingency plan emerges; investor shows interest (3-28-09)
CityCenter safe — for now (3-28-09)
In a recession, a delay could be seen by rivals as a positive development (3-28-09)

The stock of MGM Mirage soared nearly 36 percent Thursday on news that it secured financing to complete its $8.5 billion CityCenter complex on the Las Vegas Strip and settled its differences with partner Dubai World.

The gaming operator's stock closed at $8.38, up $2.20, on news of the CityCenter deal as well as the receipt of waivers from lenders that let it remain out of compliance with debt covenants through June 30. The waivers give MGM Mirage time to realign its balance sheet, which is loaded with more than $13 billion in debt that the company is having difficulty servicing because of a decline in cash flow tied to the recession.

"This is a major win for MGM in that it frees the company up to focus on its more serious problems," Bernstein Research's Janet Brashear wrote in a client note.

Still, she said, MGM is a "very speculative investment" in the near term until it outlines a plan to restructure debt.

Deutsche Bank debt securities analyst Andrew Zarnett said in a research note that MGM Mirage needs cash to make debt payments this year and, absent asset sales and changes in credit agreements, will face liquidity issues in 2010 and 2011.

"We believe that the waiver extension (to June 30, 2009 ) provides MGM with some breathing room, albeit short, to seek restructuring alternatives such as asset sales in order to reduce debt and thwart bankruptcy. At this juncture, concerns regarding the near-term maturities (due this July and October, respectively) and the deteriorating (market) fundamentals in Las Vegas continue to linger,'' Zarnett wrote.

"We believe that MGM will require selling another asset and getting (the) bank group to agree to the sale in order to solve its 2009 liquidity issues. Further asset sales and credit amendments would be required to solve its 2010 and 2011 liquidity issues,'' he wrote.

Steven Wieczynski of Stifel Nicolaus & Co. agreed the company will need to sell some assets and possibly get a capital infusion.

"Selling assets (Bellagio, Vdara) would help reduce debt levels but the number of qualified buyers remains next to none. If in fact MGM can sell assets or find suitable financing, we believe equity value would expand rapidly," Wieczynski said.

Besides asset sales and a potential equity infusion, ideas floated to correct MGM Mirage's balance sheet issues include a debt exchange or an exchange of debt for assets.

The Associated Press contributed to this report.

Discussion: 12 comments so far…

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By LemonSky

April 30, 2009

9:31 a.m.

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Oh, please, please, please, I hope the rumors that Carl Icahn borrowed rather than purchased all that MGM Mirage stock in order to "short" it are true. Nothing like seeing a corporate raider getting his comeuppance.
By davidwayneosedach

April 30, 2009

9:35 a.m.

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What good news to start the new month! Look at all the jobs!
By Frankm507

April 30, 2009

9:36 a.m.

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Here's the LV Sun again with hype machine. The stock is "soaring"? Up to $2.47! What was the 25 week high?

There's the matter of notes coming due and no revenue coming in. Not to mention, just a slight room over-capacity problem. Oop's, forgot about the housing market, lost wealth and the recession too. Everything is soaring though, according to the newspaper that owns a casino!
By Houstonjac

April 30, 2009

9:50 a.m.

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This is in response to to the outstanding news
that the CityCenter project will proceed. All along this has been a two layered drama. The first level was whether the project would survive in the short run based on cash limitations of the Joint Venture's partners,MGMMIrage and Dubai World. Notwithstanding a Dubai World law suit against MGMMirage for reasons of alleged contract breach and financial insufficiency, MGMMirage stepped up to the plate and made the required cash contributions for both parties, and entered into constructive negotiations with Dubai World and MGMMirage lenders for the purpose of holding together the project so it could be completed.
In so doing MGMMirage, not only has managed to hold the project together,but in the process has saved thousands of constuction workers' jobs for the time being, and the jobs of thousands more people needed to operate CityCenter after it is completed starting later this year.

The second level of drama relates to the numerous
construction process flaws that continue to plague the CityCenter project. While the construction process has been fast tracked for speed, this has resulted in numerous contruction defects, the most notable being at the Harmon Building where 15 of the first 22 floors, or approximately one half of the building, were contructed with faulty rebar installations, before the defects were even discovered. This led to the decision to eliminate the top half of the Harmon Building which was to be one of the outstanding archtectural features of the City Center project. Based on recent investigations and reviews of construction for the entire City Center project, this fast track construction project has resulted in a significant baklog of noncomplying construction deficiencies that must still be remedied. This condition resulted from the pace of work proceeding much more rapidly than is consistent with normal and accepted construction practices in the industry. Inspections and corrections appear not to have kept pace with the rapid progress of the CityCenter project.
By homer

April 30, 2009

10:07 a.m.

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Frankm507, You obviously have never invested or you would not know the importance of this jump in stock price as well as the message it sends to the world about this huge project? The Sun has done a fine job of reporting important news. Perhaps you should go haunt another house with your negative comments or read extremist news papers where you can get your jollies with doom and failure.
By ruby777

April 30, 2009

10:21 a.m.

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I hope I'm one of the lucky ones that gets the position I applied and interviewed for!! I'll patiently wait until December to go back to work if it's the job I really want!!!
By Sabibaby

April 30, 2009

10:37 a.m.

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This is a classic pump and dump job going on here.
By poker_ray

April 30, 2009

10:58 a.m.

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Good luck ruby777. Hope you get the job also.
By bbrummel

April 30, 2009

11:23 a.m.

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I wonder if anyone actually READ this article. To begin with the article states that MGM received financing to complete the CityCenter project but gives no specific details as to where the financing is coming from. Furthmore, they've received yet another month's extension from their banks on their ever-mounting debt as they are unable to pay their debts. The facts are plain; MGM as a corporation is still in negative earnings and is having major difficulty dealing with its debt. Now they've piled more debt on the load to complete a project that may or may not fly. Don't pop open the champagne just yet folks. As some of the previous posts mentioned, this is sensational eye-grabbing headlines and nothing else. All MGM is managing to do is put bandaids on bleeding arteries. A stock that is temporarily $8 a share is hardly an enornmous gain. I would also like to point out that it is precisely the sort of comment by "homer" that shows that Americans have a long way to go before they start making wise financial decisions when it comes to the markets.
By bbrummel

April 30, 2009

11:32 a.m.

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From MarketWatch:

It [MGM] is still working to get additional waivers or amendments before the June 30 deadline to avoid possible default and/or a Chapter 11 bankruptcy filing.

The deal "gives the company more time to sell assets in an attempt to deleverage or work through another solution with the banks," wrote Steve Kent of Goldman Sachs in a note to investors. "Also we estimate the current deal appears to leave MGM with an ability to grant about $1 billion of additional security to lenders."

However, he added, "the announcement did not resolve the company's key problems which include debt levels well above current covenants [and] we remain concerned about operating trends in Las Vegas, particularly after MGM introduces new supply in late 2009."
By rejco100

April 30, 2009

11:45 a.m.

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up 40%? SELL!
By Bone_Daddy

May 2, 2009

7:32 a.m.

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$2.40 soaring? - NO

trending well - YES

But don't discount a little positive spin in the media, 10 days later it's hovering around $8.00.

Hope you didn't sell!