MGM Plans to Issue Senior Notes

Zacks

In order to reduce debt, MGM Resorts International (MGM) recently announced that it will offer senior notes worth $700.0 million in a private placement. These notes will mature in 2020 and will be offered to institutional buyers as well as “U.S. persons” residing outside the U.S. The rate of interest was not disclosed.

It is expected that the company will use the net proceeds to decrease borrowings under its senior credit facilities or outstanding debt securities.

As of June 30, 2012, MGM Resorts had a long-term debt outstanding of $13.2 billion, down from $13.5 billion as of December 31, 2011. The company exited the second quarter with $1.73 billion in cash and cash equivalents, down from $1.87 million reported in 2011.

The company remains focused on balance sheet improvement by rearranging its debt profile. The move involves interest rate cut as well as maturity period extension. In January, MGM issued an $850 million offering of 8.625% senior unsecured notes, which will mature in 2019. In March, the company issued $1 billion of senior notes at 7.75% due 2022. This was the company’s lowest bond yield issuance since 2007. The company also amended and extended its senior credit facility to February, 2015. In March, it repaid the non-extending portion of the bank term loans. As a result of these transactions, the interest rate on the company’s extended $1.8 billion credit facility declined 200 basis points to 5% in mid-April. These actions resulted in substantial annual interest rate savings. Going forward, MGM expects to utilize additional opportunities to further reduce borrowing costs and augment overall free cash flow levels.

We believe MGM Resorts is ideally positioned to take advantage of both domestic and international opportunities. Moreover, the acquisition of a controlling interest in MGM China will likely strengthen its position in Macau and ensure higher profitability. With no new supply in the Las Vegas market, a moderate pickup in visits will augur well for the company in the domestic arena. Remodels at Bellagio and MGM Grand will likely drive the pricing power ahead.  However, expected decline in market share in Macau due to increased supply and decelerating growth in China make us cautious. Furthermore, slowdown in consumer discretionary spending in the U.S. will likely lead to a muted RevPAR growth in the third quarter. Hence, we maintain our Neutral recommendation on the stock.

Currently, MGM Resorts, which competes with the likes of Las Vegas Sands Corp. (LVS), carries a Zacks #3 Rank, implying a short-term Hold rating. Our long-term recommendation on the stock remains Neutral.
 

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