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November 26, 2014

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CityCenter partner might want more say

Experts say Dubai World’s lawsuit not an attempt to exit, but to exert greater control

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Justin M. Bowen / File photo

A scaled model of the completed CityCenter project sits in the visitors center in the Bellagio. The $8.7 billion project is expected to bring more than 10,000 jobs to the Las Vegas area.

CityCenter Construction

MGM Mirage's $9 billion CityCenter project, encompassing seven buildings, continues rising Thursday, Feb. 5, 2009. Launch slideshow »

Dubai World argues in the lawsuit it filed this week that MGM Mirage has defaulted on its CityCenter agreement, giving the foreign conglomerate the legal right to sever the relationship.

But gaming industry analysts and other observers say the real purpose of the lawsuit is not to break the partnership. Rather, they say Dubai World apparently wants to continue working with MGM Mirage, CityCenter’s managing partner — with one major change. Dubai World wants either greater control over the troubled $8.7 billion project or a larger stake for the $4.3 billion it has invested.

Were Dubai World to pull out, it would leave the project in limbo, threatening more than 10,000 jobs and rendering its investment worthless, the observers noted.

“It’s so far along, and the wind-down costs would be so great, that it’s most beneficial at this point to get it open” and making money, said Dennis Farrell Jr., a bond analyst with Wachovia Capital Markets.

In a news release Monday announcing the lawsuit, Dubai World commended CityCenter’s “enormous value” to investors and Las Vegas. The lawsuit will ensure that CityCenter is completed “on acceptable terms,” the release said.

The lawsuit claims MGM Mirage defaulted on its CityCenter joint venture agreement when the company admitted its financial troubles in an annual report filed with the Securities and Exchange Commission on March 17.

Specifically, MGM Mirage said it was unlikely to meet certain financial requirements imposed by its bank lenders and therefore received a waiver of those requirements until May 15. But that short-term waiver, which buys the company time to solve its cash crunch, wasn’t enough to prevent the company from admitting that “there is substantial doubt about our ability to continue as a going concern.”

The accounting term — going concern — typically crops up in the earnings reports of companies that are at risk of filing for Chapter 11 bankruptcy protection.

MGM Mirage said Tuesday that the lawsuit has no merit, but has declined to elaborate on the reasons.

Dubai World representatives declined further comment.

Dubai World also asserts in the lawsuit that MGM Mirage breached the agreement by mismanaging CityCenter.

MGM Mirage allowed CityCenter’s budget to spiral upward “without regard to appropriate accountability,” according to the lawsuit. Many cost overruns were not shared with Dubai World beforehand, demonstrating a “lack of candor” by MGM Mirage, the lawsuit continues.

When Dubai World signed the project joint venture agreement in August 2007, MGM Mirage hadn’t nailed down a final cost for CityCenter — a project with a budget that has been in flux since Day One. The company didn’t sign final price contracts with its general contractor, Perini Building Co., until the following year.

Dubai World says at the time of the joint venture agreement, MGM Mirage estimated CityCenter would cost $7.5 billion. MGM Mirage has since increased that estimate by about $1.2 billion, with further increases likely despite recent moves to scale back some aspects of CityCenter, the lawsuit says.

The joint venture agreement created a separate company, CityCenter Holdings LLC, with a board of directors made up of three MGM Mirage executives and three Dubai World executives. Board members must sign off on all major scope and budget changes and MGM Mirage is required to regularly update Dubai World on CityCenter’s progress and budget. These include monthly reports on construction, leasing, sales and financing. Dubai World representatives are also invited to attend weekly construction job meetings.

The lawsuit will turn on an interpretation of what constitutes a default.

The joint venture agreement states that either partner defaults on the agreement if it admits, in writing, “its inability to pay its debts as they come due.”

MGM Mirage is still making debt payments, but auditors believed there was a high enough degree of uncertainty about MGM Mirage’s ability to make debt payments and fund CityCenter — given the $1.2 billion needed to complete CityCenter and another $1 billion in bonds coming due this year — to warrant a warning.

Before the annual report’s release, CEO Jim Murren downplayed the anticipated “going concern” warning in a letter to MGM Mirage employees, saying the company’s auditors use the phrase as a required note of caution that doesn’t reflect on the quality and popularity of its casinos.

A Chapter 11 bankruptcy filing by MGM Mirage would also put CityCenter into default, which could force the project into bankruptcy court. While that might help MGM Mirage restructure those debts, it might hurt CityCenter’s prospects by allowing a court to dictate whether the company can continue to fund CityCenter while creditors, who take precedence over shareholders in bankruptcy, are owed money.

“If they file for Chapter 11, CityCenter could be delayed or suspended indefinitely,” Farrell said.

In a research note to investors Tuesday, Farrell said he thinks a Chapter 11 filing looks more likely now that Dubai World is seeking damages against MGM Mirage, further hampering CityCenter’s ability to get financing to complete the project.

That’s a major reason for MGM Mirage to attempt to avoid seeking bankruptcy protection, as well as a reason for Dubai World to prevent MGM Mirage from entering bankruptcy reorganization.

A default by MGM Mirage would allow Dubai World to buy out MGM Mirage’s interest in the project, and vice versa, according to the joint venture agreement. That scenario puts Dubai World in control of its investment but may not be ideal for CityCenter’s financial future, analysts say, especially because Dubai World has never operated casinos, let alone a resort in Las Vegas.

“MGM Mirage is still the 800-pound gorilla on the Strip,” Macquarie Capital stock analyst Joel Simkins said. “They have relationships with millions of customers that would be hard for any suitor to replicate at CityCenter. MGM Mirage might have gotten their leverage wrong in this downturn, but they certainly know how to run casinos.”

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