When it rains it pours. Shares of casino operator MGM Mirage (MGM) continue to reel after a spate of negative developments were announced last week.
In addition to the weakening economy and tough talk out of Washington, MGM saw its bonds plunge in price after a ratings cut.
Financing deal talks failed with Deutsche Bank over its yet-to-be-completed CityCenter project putting more pressure on shares. The company also said it would delay filing its annual report and may default on its financial covenants in 2009.
Moody’s Investor Service cut some ratings for the company’s debt citing the likelihood of continued softness in Las Vegas as consumers cut back on discretionary spending during the economic downturn, which will cut into gaming revenue and further hurt MGM’s liquidity.
Moody’s reduced MGM’s probability of default rating to “Caa2” from “Caa1” and cut the company’s family rating to “Caa1” from “B3.” MGM’s 6 percent bonds due 2009 dropped 12.5 cents to 47.5 cents on the dollar, while the cost to insure its debt with credit default swaps jumped to 67 percent the sum insured as an upfront cost plus annual payments of $500,000.
MGM said that its forthcoming annual report is likely to contain a graph from its auditors about whether the company will be able to continue. Last week the company said it may breach terms in its credit agreements this year in the economy continues on its current path.
While the company is trying to amend terms or receive a waiver, its bank lenders could accelerate repayment of the loans that could trigger defaults on its other debt.
A proposed deal with Deutsche Bank never came to fruition when talks stalled over the final $1.2 billion in financing for MGM’s CityCenter project. Deutsche Bank would have added its Cosmopolitan resort to CityCenter and provide the necessary financing, potentially for an equity stake in CityCenter.
Deutsche Bank acquired the Cosmopolitan project in a foreclosure after its developer defaulted on a $760 million construction loan. It is located on the West side of the Strip near the CityCenter project and MGM’s crown jewel property, Bellagio, so a combination would have made sense from a geographic standpoint.
MGM continues with talks to amend its debt covenants. Raising new equity to reduce leverage is another way to avoid breaching the covenants and the company boasts deep-pocketed investors like billionaire Kirk Kerkorian’s Tracinda Corp. and sovereign wealth fund Dubai World.
Analysts believe if they pony up more capital the company’s bonds and the term loan could see a nice pop in price. New capital could also be helpful in buying back debt at distressed prices and improve its leverage covenants.
This article was written by Jamie Dlugosch, contributor to InvestorPlace Media. For more actionable insights likes this, visit www.InvestorPlace.com.
