Capital Markets

MGM Mirage Drains Its Credit Kitty

The gaming firm takes the last $842 million from its credit facility as it faces a storm of financial woes and a growing risk of default.
Stephen TaubFebruary 27, 2009

MGM Mirage resembles one of its customers who stay too long at the gaming tables. It is running out of money.

The casino company majority-owned by Kirk Kerkorian asked to borrow $842 million from its senior credit facility. Excluding $93 million in outstanding letters of credit, the new borrowing represents the total remaining amount available under the 7 billion facility.

The company said in a regulatory filing Friday that it made the borrowing request in light of the continuing instability in the capital markets and uncertain state of the global economy. The funds will be used for general corporate purposes. 

Kerkorian has taken a financial beating on MGM Mirage. Tracinda, Kerkorian’s holding company, last October pledged an additional 50 million shares of MGM Mirage stock as collateral to backstop a $600 million credit line to buy a stake in Ford Motor Co., Bloomberg News reported at the time. Kerkorian sold the Ford stake shortly thereafter. Tracinda holds nearly 149 million shares of MGM Mirage, or slightly less than 54 percent of the total shares, according to a regulatory filing.

On Oct. 30. MGM Mirage sold about $700 million in five-year notes. In December, the company agreed to sell its Treasure Island Hotel & Casino in Las Vegas for $775 million in cash and notes to real estate investor Phil Ruffin.

Ruffin is paying $500 million in cash, with $275 million in secured notes with an interest rate of 10 percent. Under the deal, $100 million is payable no later than 175 days after closing and $175 million no later than 24 months after closing. The notes, to be issued by Ruffin Acquisition LLC, will be secured by the assets of Treasure Island and will be senior to any other financing. The deal is expected to close by the end of the second quarter.

In response to Friday’s filing, Fitch Ratings downgraded MGM Mirage’s default rating to CCC from B and dropped several outstanding debt ratings as well. The rating outlook on the company remains negative.

The downgrade affects MGM’s $7 billion credit facility, $6.5 billion of outstanding senior unsecured debt, $848 million of outstanding senior subordinated debt, and $750 million of senior secured notes, Fitch noted.

“The downgrade reflects MGM’s credit facility draw in the context of the company’s strained liquidity position and the continued expected deterioration of Las Vegas operating trends,” the rating agency explained.

Fitch said it previously noted that it believes MGM is unlikely to remain in compliance with its 7.5-times leverage covenant this year, so fully drawing on the revolver increases the likelihood of a near-term covenant breach.

Fitch noted that MGM took meaningful steps to bolster its liquidity position over the last couple of months, which had reduced concerns about MGM’s ability to meet 2009 debt maturities. However, it believes MGM will have difficulty funding the remaining CityCenter costs and meeting 2010 debt maturities of $1.1 billion, without additional external capital. CityCenter is MGM’s ambitious city-within-a-city, featuring four luxury high-rise residential condo developments on the Las Vegas Strip.

As a result, Fitch believes the credit facility draw may indicate that a restructuring could occur before the 2009 maturities. Even if the credit facility draw proves not to be a precursor to some sort of near-term restructuring, and the company is able to fund CityCenter and 2010 maturities, the company faces significant financial challenges.

In 2011 it will have to address the refinancing of its $7 billion credit facility, while meeting another $532 million of bond maturities, Fitch noted.

Even if the company obtains waivers or amends the terms of the credit facility and is able to secure funding for CityCenter, Fitch believes the deterioration of Las Vegas trends and strained forward outlook indicates that the capital structure may be unsustainable. “As such, Fitch believes that drawing the revolver reflects increased likelihood of a default of some kind, including the possibility of a distressed debt exchange (DDE),” it added.