March 23, 2009 / 5:27 PM / in 9 years

Fitch cuts MGM Mirage, warns debt exchange likely

NEW YORK, March 23 (Reuters) - Fitch Ratings on Monday cut its ratings on MGM Mirage (MGM.N) to one step above default and warned a distressed debt exchange of the casino operator’s bonds “appears imminent or inevitable.”

Fitch cut MGM’s debt rating three notches to ‘C’, an extremely speculative grade, from “CCC”, and said it was unable to give an outlook because of the debt’s high level of risk.

MGM last week reported a fourth-quarter loss of $1.15 billion and said its banks had agreed to waive debt covenants through May 15. Earlier in March, it warned that auditors had substantial doubt about the company’s ability to continue as a going concern. For details, see [ID:nN17284539]

“Even if a coercive debt exchange is not part of a near-term restructuring, Fitch believes that MGM’s impaired credit profile and medium-term financial challenges make default of some kind appear inevitable,” Fitch said in a statement.

In a coercive, or distressed, debt exchange, bondholders are typically asked to swap existing debt for new debt or equity at less than the bonds’ par value. Rating agencies count this as a default.

MGM is exploring alternatives including asset sales to improve its liquidity.

Fitch said Penn National Gaming Inc (PENN.O), Boyd Gaming Corp (BYD.N) and Crown Ltd (CWN.AX) may be likely buyers of MGM assets in the near-term, though it may be a challenge for the companies to agree on prices.

“Selling an asset at a low multiple may enhance liquidity to the detriment of the longer-term credit profile, which is strained even if the company can get past the near-term liquidity squeeze,” Fitch said.

    Raising new debt or equity would be challenging for MGM unless Kirk Kerkorian, the casino operator’s majority shareholder, also “contributes a significant amount of additional capital alongside investors,” Fitch said.

    “In order to maintain the equity optionality, Fitch believes Kerkorian has strong incentive to exhaust all options before a potential bankruptcy filing,” the rating agency said. “While that incentive supports the possibility of an equity infusion, it also provides strong support for attempting a coercive debt exchange, which would also be a positive outcome from the banks’ perspective.”

    MGM’s bondholders may be unlikely to participate in a coercive exchange, however, as they may recover more from the debt if MGM filed for bankruptcy protection, unless MGM pledges collateral against its bank loans, which would subordinate its bondholders, Fitch added.

    “A coercive debt exchange may be difficult to execute because Fitch believes that unsecured bondholders have solid recovery prospects under the current capital structure,” it said. “However, unsecured debt recovery would be affected by MGM providing collateral to lenders as part of the restructuring, which is a likely scenario in Fitch’s view.” (Reporting by Karen Brettell; Editing by Chizu Nomiyama)

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