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August 31, 2014

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MGM Mirage issues plan that avoids selling Bellagio, Mirage

Analyst thinks Mandalay Bay could be ‘sacrificial lamb’

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Justin M. Bowen

A jogger passes The Mirage on the Las Vegas Strip in the early morning hours.

Updated Wednesday, May 13, 2009 | 1:46 p.m.

MGM Mirage properties

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MGM Mirage today unleashed a series of financial initiatives aimed at bolstering its balance sheet -- and signaled its Bellagio and Mirage hotel-casinos won't be sold anytime soon.

Amid a broad market decline caused by disappointing retail sales numbers, MGM Mirage stock tumbled 30 percent to close at $8.70, down $3.70, as investors absorbed the news including a dilution of the stock value because of a plan by MGM Mirage to issue new equity.

The hotel-casino and entertainment giant, based in Las Vegas and struggling in the recession to service more than $14 billion in debt, said it would:

- Sell 81 million shares of common stock to the public, with majority shareholder Kirk Kerkorian's Tracinda Corp. planning to buy about 10 percent of those shares. The equity issuance should raise about $1 billion, MGM Mirage said.

- Take on new debt in the form of $1.5 billion in senior secured notes -- bonds secured by the Bellagio and Mirage assets, meaning they couldn't be sold unless other security is designated to back up the bonds.

- Buy back some $1.046 billion in bonds due this July and October, with bondholders receiving a bonus payment if they tender their shares by an early tender deadline of May 27. In the cash tender offer for the notes due July 31 and Oct. 1, bondholders who tender their notes on or before May 27 will receive $1,000 per $1,000 principal amount. Those tendering after, until the deadline of June 10, will receive $970.

MGM Mirage stock traded lower on the news, with the stock offering potentially being dilutive by increasing the number of shares outstanding. In midday trading, the company's shares were down 23 percent at $9.50.

With speculation in recent weeks that MGM Mirage would sell the Bellagio or Mirage to Wynn Resorts or another gaming operator to beef up MGM Mirage's debt-heavy balance sheet -- speculation downplayed by MGM Mirage Chief Executive Jim Murren -- two analysts noted that today's announcements encumbered both properties but didn't tie up Mandalay Bay.

"We find it intriguing that the company's ($1.5 billion) private placement issue of secured notes be secured by a first-priority lien on substantially all of the assets of Bellagio and The Mirage, while Mandalay Bay remains unsecured" analyst Joel Simkins of Macquarie Securities said in a note to clients. "In our view, should (MGM Mirage) decide to sell further Las Vegas assets, we believe Mandalay remains the likely 'sacrificial lamb'. We note that Penn National has expressed interest in this asset, and in our view, this property could make for a good strategic fit for the company."

MGM Mirage has declined to comment on any specific asset sales possibilities.

Simkins noted "MGM Mirage hit the Superfecta" with its announcements today, which included further amendments to its debt covenants that are likely to help it avoid having to file for bankruptcy protection.

"Clearly at this point, while the company will remain highly leveraged from a balance sheet perspective and still highly concentrated on the Las Vegas Strip, it does not likely have going-concern risk," he said.

Companies with a "going-concern" risk are vulnerable, under accounting terminology, to insolvency or bankruptcy.

Analyst Steven Wieczynski of Stifel Nicolaus Capital Markets also highlighted the possibility of a Mandalay Bay sale.

"With the Bellagio and Mirage assets being used for collateral, we believe this removes the chance for a possible sale of either asset. However, with MGM paying down Mandalay's debt, we believe Mandalay Bay or other Mandalay assets could now be on the shopping list," he wrote.

Oppenheimer analyst David Katz said the plans announced today would slightly reduce overall leverage at MGM Mirage, but increase its interest costs. He said the $1 billion equity plan appears to imply it will issue stock at a valuation discounted 13 percent from trading levels before the announcement.

"We believe most bankruptcy concerns had been removed from the shares, focus on a restructuring event had been priced into the shares and the overall impact of the restructuring is valuation dilutive. As such, we view the announcement as bearish for the shares," Katz wrote.

Steven Kent of Goldman Sachs wrote: "Our initial take is that, assuming the deal is completed, it removes the most severe risk today and that it will shift the (MGM Mirage) discussion to valuation and Las Vegas fundamentals."

Besides retiring the bonds due in July and October, the $2.5 billion raised in the debt and equity issuances would be used to repay at least $750 million outstanding under MGM Mirage's senior credit facility, retire notes due 2017 and for general corporate purposes.

MGM Mirage didn't immediately say how much the deals would change total debt levels or how much its annual interest costs would change.

Today's news was not a surprise. After reaching an agreement to finalize construction financing for its $8.5 billion CityCenter project on the Las Vegas Strip, MGM Mirage was expected to focus on debt-reduction measures.

Those measures potentially would involve asset sales, though none were announced today; as well as an equity infusion, a debt exchange, or a swap of debt for assets.

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