News On CityCenter Pays Off For Casinos
Casino stocks rallied Thursday on the news that MGM Mirage will proceed with its ambitious yet troubled CityCenter project, which had been rumored headed toward bankruptcy.
On Wednesday MGM and Dubai World reached an agreement with their lenders on a plan to fully finance CityCenter, an $8.5 billion residential and casino development on the Las Vegas Strip.
CityCenter's bank lenders also have given the casino giant an extra 45 days to set its house in order and avoid debt covenant violations.
MGM MGM shares soared 36% to 8.38 Thursday, reaching their highest close since late January. They hit 9.94 intraday.
Las Vegas Sands LVS and Wynn Resorts WYNN jumped out to double-digit gains. But they gave up most of their early advances by the close.
Amid all the partying, MGM's troubles are far from over. It still faces an onerous debt load of $13.5 billion. Along with Harrah's Entertainment, Las Vegas Sands, Station Casinos and other Vegas operators, MGM must continue to hold off lenders as it struggles to reduce leverage in the industry's worst business environment in decades.
Mushrooming debt is at the heart of the crisis in Las Vegas.
Susquehanna analyst Robert LaFleur notes that back in the early 1990s, the industry as a whole had a total debt to EBITDA ratio of 1.
Since the mammoth leveraged buyout of Harrah's in 2007, the ratio of total debt to EBITDA among large-cap gaming stocks has hovered around 9.
Harrah's labors under a leverage ratio of more than 10, says Christopher Snow, an analyst with CreditSights. He calls that figure "unsustainable."
"There's a low probability MGM will be able to resolve its problems without restructuring its debt," Snow said.
Rising debt can be managed so long as sales keep pace. Indeed, one reason the casinos were able to borrow so much in recent years was because of the widely held view that they're recession-resistant.
That notion has since been shattered. Casino winnings have declined 18 straight months.
The Nevada Gaming Control Board reports that in February -- the most recent month data are available -- the total "gaming win" for Nevada gambling licensees was down 18% from the year before.
Losing Combination
The mix of plummeting revenue and towering debt has put MGM in a perilous relationship with lenders.
The company has exceeded the 7.5 leverage ratio allowed by bank lenders such as Bank of America BAC, Snow says.
MGM, controlled by billionaire financier Kirk Kerkorian, said a waiver of financial covenant requirements and leverage restrictions on its $7 billion senior credit line has been extended to June 30. The previous temporary waiver was set to expire May 15.
The $7 billion in bank debt comes due in 2011.
MGM and the other casinos are doing everything they can to keep the banks off their backs, watchers say.
"These companies have been negotiating with creditors to avoid tripping covenants and defaulting on debt," said Matthew Jacob, an analyst with Majestic Research.
In mid-April, Las Vegas Sands and Wynn Resorts WYNN announced that their bankers had rejiggered loan terms enough to give them some breathing room.
In return, the banks won concessions. In Wynn's case, the banks agreed to overlook certain covenants until June 2011 in exchange for a hike in the rate Wynn pays on its debt.
Most analysts consider Wynn to be among the stronger casino operators. Banks might not be as patient with more troubled casino companies.
MGM, Harrah's and Las Vegas Sands are thought by many analysts to be in the most imminent danger.
MGM's properties include high-end casinos such as the Bellagio, Mandalay Bay and the Mirage, along with mass-market favorites like Circus Circus and Excalibur.
The company could raise cash and pay off some debt by selling one or more casinos. But such sales would not necessarily help with loan covenants on bank debt.
Time To Sell, But To Whom?
For MGM or other indebted operators to lower their leverage ratios, they would have to sell at higher prices than the current market will pay, analyst Jacob says.
MGM has the properties to sell -- but selling at current prices might not help.
"It won't help them to sell at fire-sale prices," Jacob said. "They have to sell properties at decent multiples."
With casino winnings falling and credit hard to come by, few buyers exist.
"The only people with the capacity to buy are people with access to capital," Susquehanna's LaFleur said.
Those rumored to have the interest and access to capital include the Australian gaming giant Crown Ltd., the private equity firm Colony Capital, and Penn National Gaming PENN, a public racetrack and riverboat game operator.
One way or another, Las Vegas is likely in for wholesale changes in ownership. Individual properties will be sold to reduce corporate debt. In some cases, creditors might take control.
"I think the ownership of the Strip will be dramatically different in three years," LaFleur said.
Meanwhile, the casinos will do what they can to lure people back into their darkened gambling halls. One current tactic: lower room rates.
Las Vegas was once known for its bargain rooms. Back in the '90s most rooms were priced within 10% of the average U.S. hotel room, LaFleur says.
But over time, the rates crept up to the point where last year, a room in Vegas was on average 50% more expensive than the average.
With vacancy rates rising, some casinos have again slashed rates.
Doing so can backfire by attracting "low rollers" who bet less at the tables and slots, some observers warn.
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