MGM Resorts Bellagio, Circus Circus Sales Have Positive Credit Implications, Says Moody’s

Posted on: October 21, 2019, 07:00h. 

Last updated on: October 21, 2019, 11:19h.

Todd Shriber @etfgodfather Read More
Expertise: Financial, Gaming Business, Mergers and Acquisitions.

Last week, MGM Resorts International (NYSE:MGM) confirmed that it’s selling the Bellagio to a real estate partnership controlled by Blackstone Group Inc. (NYSE:BX) for $4.25 billion, and the Circus Circus to Treasure Island owner Phil Ruffin for $825 million.

MGM Resorts CEO Jim Murren’s desire for a fortress balance sheet could help the company’s credit rating. (Image: Boston Globe)

MGM will garner about $4.3 billion in after-tax proceeds from the sales of the two Las Vegas Strip assets, cash analysts widely expect the gaming company will use to reduce debt and return capital to shareholders via buybacks and dividends.

At least one ratings agency views MGM’s asset sales as having positive implications for the company’s credit rating.

These transactions, which move MGM closer to becoming an asset-light casino company, are credit positive because we expect that MGM will largely use the net proceeds to repay funded domestic debt by, thereby lowering funded consolidated leverage and improving the company’s debt maturity profile,” said Moody’s Investors Service.

At the end of the second quarter, MGM carried $14.8 billion in liabilities, one of the largest debt burdens in the gaming industry. Moody’s has a Ba3 credit rating with a “positive” outlook on MGM corporate bonds. Debt with one of the agency’s three Ba marks “are judged to have speculative elements and subject to substantial credit risk.”

Lukewarm Reaction

Investors stand to benefit from MGM’s divestments, particularly if the company lives up to promises to bolster its balance sheet and return capital to shareholders. But reaction to the Bellagio and Circus Circus sales was muted last week, as shares of the gaming company traded slightly lower.

JPMorgan analyst Joseph Greff called the sales “the big bang that should have been, but wasn’t,” while noting some investors probably used the headlines to reduce positions in MGM. Some on Wall Street have also expressed concern about the convoluted nature of the Bellagio deal.

In that transaction, MGM is selling the property assets of the Strip venue to Blackstone’s Blackstone Real Estate Income Trust (BREIT). The gaming is taking a five percent interest in BREIT and agreeing to a 30-year lease term starting at $245 million annually.

The Circus Circus deal is more straightforward. Ruffin is shelling out $662.5 million in cash, with a $162.5 million note coming due in 2024. Both sales are expected to be completed before the end of this year.

What’s Next

MGM still has some cards to play in its quest to become an asset-light company. The gaming firm could seek sale-leaseback transactions, the deal structure in the Bellagio divestment, for MGM Grand and MGM Springfield.

The company could also look to wring some value from its 50 percent interest in mixed-use complex CityCenter, as well its 68 percent stake in MGM Growth Properties (NYSE:MGP).

“The company stated its intention to reduce domestic net debt/EBITDA (on a restricted group basis) to about 1.0x,” said the ratings agency. “Moody’s-adjusted consolidated adjusted leverage will remain largely unchanged because the company will take on the lease obligation and has agreed to guarantee the proposed financing that the joint venture will arrange to fund the real estate purchase. The use of asset sale proceeds to reduce funded debt supports the company’s move to an asset-light operating model.”