TEXT - S&P raises MGM Resorts International rating

Thu Dec 6, 2012 12:32pm EST

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Overview
     -- Las Vegas-based gaming operator MGM Resorts launched a tender
offer to repay its existing senior secured notes and credit facilities with
proceeds from a new $4 billion senior secured credit facility and $1 billion in 
unsecured notes.
     -- We are raising our corporate credit rating on MGM to 'B+' from 'B-'.
     -- We are assigning issue-level ratings to the company's proposed senior 
secured credit facility and senior unsecured notes.
     -- The stable rating outlook reflects our expectation that credit 
measures will remain at a level that is in line with the rating over the next 
few years, including consolidated leverage in the mid-to-high 6x area and 
EBITDA coverage of interest above 2x.
 
Rating Action
On Dec. 6, 2012, Standard & Poor's Ratings Services raised its corporate 
credit rating on MGM Resorts International to 'B+' from 'B-'. The rating 
outlook is stable.

At the same time, we assigned our 'BB' issue-level and '1' recovery ratings to 
MGM's proposed $4 billion senior secured credit facility. The '1' recovery 
rating reflects our expectation of very high (90% to 100%) recovery for 
lenders in the event of a payment default. The credit facilities will consist 
of a $1.25 billion revolving credit facility, $1.25 billion term loan A, and a 
$1.5 billion term loan B. The revolver and term loan A will mature in five 
years and the term loan B in seven years. We also assigned our 'B+' 
issue-level and '4' recovery ratings to MGM's proposed $1 billion senior 
unsecured notes due 2021. The '4' recovery rating reflects our expectation of 
average (30% to 50%) recovery for lenders in the event of a payment default. 
Proceeds from the proposed new credit facilities and unsecured notes, together 
with cash on hand, will be used to refinance the company's existing credit 
facilities and to repay the company's various secured notes issuances, as well 
as to pay transaction fees and expenses and for general corporate purposes.

We also upgraded all existing issue-level ratings by two notches in 
conjunction with the upgrade of the corporate credit rating. We expect to 
withdraw our issue-level ratings on the company's senior secured notes 
issuances once the tender offer for the notes is completed and the notes are 
repaid.

Rationale
The rating upgrade reflects the company's planned refinancing transaction, 
which will reduce the company's interest burden given the high coupons on the 
company's various secured notes issuances, thereby improving interest coverage 
and cash flow generation. Although MGM's wholly owned operations will remain 
highly leveraged, we expect interest coverage to improve to 1.5x or better 
following these transactions, and expect the company will generate moderate 
amounts of free cash flow that can be used for further debt repayment in 
future periods. Additionally, the contemplated transactions, along with 
transactions completed earlier this year, address a substantial amount of 
MGM's debt maturities over the next 3 years, meaningfully improving the 
company's maturity profile.

The rating upgrade also reflects a reassessment of our treatment of MGM China. 
We had previously indicated that we could reassess our treatment of MGM China 
once timeline and financing strategy for its planned Cotai development became 
clearer, and if management more clearly articulated a capital structure 
strategy and dividend policy. Although the timeline is still a bit uncertain 
as to the start of construction for its planned $2.5 billion development in 
Cotai, MGM China has formally accepted its land concession contract, which, 
along with an amended and restated $2 billion credit facility, provides 
clarity as to the company's financing strategy. We believe that the credit 
facility, along with excess cash and cash flow generation, should be 
sufficient to fund planned expenditures. Additionally, the amended and 
restated credit facility also provides some flexibility for MGM China to 
continue to pay dividends to shareholders, of which MGM would receive 51%, 
given its ownership stake. Although the company has not articulated a formal 
dividend policy, we expect it will use the flexibility in its credit agreement 
to pay dividends over the next few years. We have factored in an expectation 
that MGM Resorts continues to receive liquidity support from MGM China in the 
form of dividends ranging from $150 million to $200 million over the next few 
years, which is in line with the dividend received earlier this year.

We believe MGM China is strategically important to MGM Resorts' current 
identity and future strategy. MGM China operates in the same line of business 
as MGM Resorts, shares a common brand, and represents a growth vehicle for 
further international developments, a key focus of the company. Additionally, 
MGM Resorts maintains a controlling ownership position, and consolidates MGM 
China within its financial statements. MGM China also represented 
approximately one-third of MGM Resorts' consolidated property level EBITDA in 
the 12 months ended Sept. 30, 2012, which, in our view, is meaningful. Thus, 
despite the distinct financing structures at MGM Resorts and MGM China, we 
will consider the consolidated entity when assessing MGM's credit quality 
going forward. We deem the strategic relationship between the parent and 
subsidiary as an important factor that has a bearing on the credit quality of 
the overall consolidated entity. Consolidated credit measures, including MGM 
China, are aligned with the 'B+' rating based on our business risk assessment 
of the company, including our expectation that leverage will track below 7x 
and EBITDA coverage of interest above 2x by the end of 2013.

Our ratings incorporate our expectation that MGM Resorts' wholly owned revenue 
will grow in the low single digit percentage area and EBITDA in the 
mid-to-high single digit percentage area in 2013. This forecast is primarily 
driven by our expectations for performance on the Las Vegas Strip in 2013. In 
2013, we expect gaming revenue on the Las Vegas Strip to grow in the low 
single digit percentage area and for RevPAR to increase in the low-to-mid 
single digit percentage area, driven largely by modest increases in customer 
spending and visitation, anticipated strength in group booking levels, stable 
supply, and continued strong hotel occupancy. We also expect Las Vegas Strip 
operators to benefit from improving room rates, particularly as a result of 
recent room remodels. For MGM China, we expect low-to-mid single digit growth 
in both revenue and EBITDA in 2013. Our performance expectations incorporate 
our view that gaming revenue in Macau in 2013 will grow 5% to 10%, aligned 
with our economists' expectations for GDP growth in China, as well as our 
expectation that MGM will continue ramping up performance at the Macau 
property.

Our corporate credit rating on MGM reflects our assessment of the company's 
financial risk profile as "highly leveraged" and its business risk profile as 
"satisfactory," according to our criteria.

Our assessment of MGM's financial risk profile as highly leveraged reflects 
its high debt leverage despite the proposed refinancing transactions and 
wholly owned EBITDA coverage of interest that we expect to be at least 1.5x 
pro forma for the announced transactions. We expect consolidated leverage 
(including MGM China) to be in the mid-to-high 6x area over the next two 
years. (Excluding China, we expect leverage to be over 9x over that same time 
period.) These factors are partially offset by our expectation that the 
company will generate a moderate amount of free cash flow, its improved 
maturity profile following the completion of the contemplated transactions, 
and an expectation that the company will maintain access to capital markets 
such that it will be able to address a step up in maturities to about $2.3 
billion in 2015.

Our assessment of MGM's business risk profile as satisfactory reflects its 
leading presence on the Las Vegas Strip, strong brand identity, and an 
experienced management team; somewhat offset by its limited geographic 
diversity outside of Las Vegas and a concentration of cash flows in that 
market.

Liquidity
Based on likely sources and uses of cash over the next 12 to 18 months, MGM 
has an "adequate" liquidity profile, according to our criteria. Relevant 
elements of its liquidity profile include:
     -- We expect sources of liquidity to exceed uses by at least 1.2x.
     -- Net sources of liquidity would remain positive, even with a 15% 
shortfall in EBITDA relative our current performance expectations.
     -- We believe, as evidenced by recent and current capital markets 
transactions, that the company has a sound relationship with its banks and a 
satisfactory standing in credit markets.
     -- While the covenant package for the new secured credit facility has not 
yet been set, we expect it will include a minimum EBITDA covenant and that 
levels of the covenant will be set with sufficient cushion to withstand an 
EBITDA shortfall of 15% relative to our current performance expectations.
 
As of Sept. 30, 2012, MGM had about $2.4 billion of cash on its balance sheet, 
including $936 million in cash held at MGM China. (We expect the company will 
use a significant amount of this excess cash as part of this refinancing 
transaction.) Pro forma for the proposed transactions, MGM will have a new 
$1.25 billion revolving credit facility, of which we expect about $1 billion 
to be available(based on our estimate of how much will be drawn at close). The 
expected sale of its 50% ownership in Borgata Hotel Casino & Spa and related 
land in Atlantic City is an additional potential source of liquidity for MGM, 
and we have factored in a cash inflow of roughly $175 million in 2014. This 
inflow includes about $150 million of cash held in trust that will be released 
to MGM Resorts upon a sale of the asset. Additionally, we have factored in 
annual dividends to MGM Resorts from MGM China in the range of $150 million to 
$200 million over the next few years.

In the first nine months of 2012, MGM (excluding MGM China) generated $202 
million in cash from operating activities, which was insufficient to fund 
around $266 million of capital expenditures. MGM expects to spend about $365 
million on capital expenditures this year, including spending associated with 
room remodels at Bellagio and MGM Grand. We expect similar levels of capital 
spending in 2013 and have factored in a range of $350 million to $400 million 
in capital expenditures at wholly owned domestic resorts. Under our forecast, 
we expect the company will generate moderate levels of free cash flow that 
could be used to repay outstanding debt.  

Pro forma for this transaction, debt maturities are manageable over the next 
few years, as the transactions meaningfully improve the company's maturity 
profile. We expect near-term maturities in 2013 and 2014 will be met through a 
combination of cash on hand, free cash flow, including dividends from MGM 
China and proceeds from the Borgata), along with additional debt refinancing 
transactions. Maturities step up to $2.3 billion in 2015 (which include the 
$1.45 billion of convertible notes and a $875 million senior unsecured note).

Outlook
The stable rating outlook reflects our expectation that credit measures will 
remain at a level that is in line with the 'B+' rating over the next few 
years, including consolidated adjusted leverage in the mid-to-high 6x area and 
EBITDA coverage of interest above 2x. Our rating factors in an expectation 
that wholly owned EBITDA will grow in the mid-to-high single digit percentage 
area and Macau EBITDA will grow in the low-to-mid single digit percentage area 
in 2013. We also expect MGM Resorts will generate a moderate amount of free 
cash flow that could be used to repay debt at the U.S. entity, and that it 
will continue to be able to access capital markets in order to address 
intermediate-term debt maturities, specifically the step-up in maturities in 
2015.

We are unlikely to consider a higher rating over the intermediate term, given 
our expectation that consolidated leverage will remain above 6x over the next 
few years. Additionally, the company's pipeline of potential development 
projects limits further upside until the success of the company's bids and the 
structure and financing strategy for the projects becomes clear. We could 
consider a lower rating if performance trends in Las Vegas and/or Macau fail 
to meet our expectations, either a result of a softening global or 
market-specific economic environment in either of those markets and/or 
increasing levels of competition. Additionally, we could consider lower 
ratings if the company is successful in its pursuit of development projects 
and the financing strategy for those projects is not aligned with our 
expectations at the current rating level.

Related Criteria And Research
     -- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
     -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
     -- Use Of CreditWatch And Outlooks, Sept. 14, 2009
     -- Criteria Guidelines For Recovery Ratings, Aug. 10, 2009
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
     -- Parent/Subsidiary Links; General Principles, Oct. 28, 2004
 
Ratings List
Upgraded
                                        To                 From
MGM Resorts International
 Corporate Credit Rating                B+/Stable/--       B-/Positive/--
 Senior Secured                         BB                 B+
   Recovery Rating                      1                  1
 Senior Secured                         B+                 B-
   Recovery Rating                      3                  3
 Senior Unsecured                       B+                 B-
   Recovery Rating                      4                  4

MGM Grand Detroit LLC
 Senior Secured                         B+                 B-
   Recovery Rating                      3                  3

Mandalay Resort Group
 Senior Unsecured                       B+                 B-
   Recovery Rating                      4                  4
 Subordinated                           B-                 CCC
   Recovery Rating                      6                  6

New Rating

MGM Resorts International
 Senior Secured
  $1.5B term loan B bank loan due 2019  BB                 
   Recovery Rating                      1                  
  $1.25B revolver due 2017              BB                 
   Recovery Rating                      1                  
  $1.25B term loan A due 2017           BB                 
   Recovery Rating                      1                  
 Senior Unsecured
  $1B sr nts due 2021                   B+                 
   Recovery Rating                      4
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