Capital Markets

MGM Mirage: Dicing with Debt

A gigantic bet goes sour.
Economist StaffApril 17, 2009

“The sort of project God would build if he had the money.” That is how the boss of one of MGM Mirage’s rivals once described the American casino operator’s $8.6 billion-$8.7 billion CityCenter development on the Las Vegas Strip. Now MGM Mirage’s managers may be praying for divine intervention to help get them out of trouble. A legal spat and a dire economy have turned CityCenter, one of the world’s most ambitious real-estate projects, into a nightmare just as the casino giant grapples with a $13.5 billion debt burden that threatens to tip it into bankruptcy.

This week brought a sliver of good news for the company. On April 13th MGM Mirage said its bankers had agreed to amend loan agreements to let it pay $70m of construction costs for CityCenter due by the end of the week. That will keep work going on the 67-acre site of hotels and casinos. But MGM Mirage and its partner in the 50-50 joint venture, Dubai World, are at loggerheads. The investment firm has sued MGM Mirage, accusing its managers of letting costs spiral out of control. The casino operator says its partner approved all budgets for the project, which is due to open at the end of the year.

In March Dubai World refused to provide its half of a $200m payment due for CityCenter, leaving MGM Mirage to pick up the whole tab. This week’s deal with its banks means the casino operator can pay the latest instalment on the project in full, even if its partner refuses to pay up once again. Dubai World has said it is committed to CityCenter, but wants reassurance that MGM Mirage-and the banks lined up to lend $1.8 billion to the project-will honour their commitments.

Dubai World has good reason to fret about MGM Mirage: last month the casino firm said it was struggling to stay in compliance with the terms of its loan agreements. Revenues have plummeted as punters have cut back on their gambling or stayed away altogether. MGM Mirage recently sold its Treasure Island casino on the Strip to raise some badly needed cash.

MGM Mirage isn’t the only one reeling. Many casino firms, including Harrah’s Entertainment and Station Casinos, gorged on debt to finance expansion in the belief that Las Vegas would be impervious to a downturn. They were wrong: according to Nevada’s Gaming Control Board, gambling revenues fell by almost 10% last year, by far the steepest drop since records began 54 years ago. A glut of rooms has also dented firms’ income. If CityCenter opens on time, it will make this situation worse. “It’s going to cannibalise everyone’s business,” warns Dennis Forst, an analyst with KeyBanc Capital Markets.

In response, casino owners are desperately trying to reduce their borrowings. On April 9th Harrah’s announced a deal that sliced almost $1.9 billion off its debt, according to an estimate by CreditSights, a research firm. MGM Mirage is devising a plan to slash its own debt. It is considering selling more casinos and restructuring some loans. With luck, it will avoid bankruptcy. But don’t bet on it.