Capital Markets

Investors Smile, Raters Frown on MGM

Kirk Kerkorian's investment vehicle, Tracinda, has announced interest in two of the casino operator's most valuable properties.
Stephen TaubMay 22, 2007

On reports that billionaire Kirk Kerkorian has expressed interest in certain properties of MGM Mirage, shareholders sent the casino operator’s stock on daylong winning streak that saw its price more than 27 percent higher at Tuesday’s market close.

As for the credit rating agencies — which also noted the announcement by Kerkorian’s investment vehicle, Tracinda, of talks regarding MGM’s Bellagio and its CityCenter development on the Las Vegas Strip — they seem less inclined to “let it ride” without further information.

Standard & Poor’s placed MGM on CreditWatch with negative implications and added that it may cut the company’s rating from BB, which is already two levels below investment grade. “In resolving the CreditWatch listing, we will monitor future developments pertaining to these announcements, and respond when we are able to better assess any implications to MGM Mirage’s credit profile,” S&P reportedly stated.

Fitch Ratings placed MGM on Rating Watch Negative, a position it expects to resolve “after gaining clarity on the outcome of the situation and reviewing the potential impact on MGM’s credit.” The firm added that “while Tracinda’s filing is rather vague and it is too early to know what that potential outcome will be, Fitch believes that it is likely any financial restructuring would adversely affect MGM’s credit profile, which has already weakened since Fitch affirmed MGM’s ratings last December.”

Moody’s affirmed MGM’s existing Ba2 corporate family rating and its SGL-3 speculative-grade liquidity rating. However, the rating outlook remains negative, added Moody’s, considering that Tracinda wants to purchase MGM’s most valuable properties and pursue strategic alternatives with respect to its 56 percent stake in the company.

“The negative outlook also reflects higher spending levels in 2007 that may result in higher than anticipated leverage over the next several years,” stated Moody’s. The firm also warned that MGM’s ratings could be downgraded following a leveraged or other transformational transaction, if spending for growth opportunities increased, or if expected earnings growth slowed, depending on materiality and other factors such as timing of cash outflows for new investments or future assets sales.