MGM, Wynn Could Be Hampered by High Leverage in Recession

Posted on: March 7, 2023, 02:03h. 

Last updated on: March 7, 2023, 04:28h.

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

MGM Resorts International (NYSE: MGM) and Wynn Resorts (NASDAQ: WYNN) are among the companies with high debt burdens that could be vulnerable in a recession.

Wynn Resorts
Wynn and Encore on the Las Vegas Strip, seen above. That operator and MGM could be vulnerable in a recession. (Image: Luxury Lifestyle Magazine)

Recession fears are front-and-center for Corporate America and investors because there’s increasing concern that the Federal Reserve won’t be able to engineer a soft economic landing. In testimony before Congress on Tuesday, Fed Chairman Jerome Powell said the central bank will have to be more aggressive than expected with its 2023 rate hikes because inflation remains elevated.

Central banks employ tighter monetary policy to cool overheating economies or to dampen inflation. Rapidly rising interest rates can blunt economic activity, potentially ushering in a recession in the process. A recession is defined as two consecutive quarters of GDP contraction — a scenario that arrived last year. Steady job growth quashed recession speculation in 2022, but a slew of banks and economists see economic contraction arriving in earnest later this year.

That could weigh on companies with large debt burdens, including MGM and Wynn Resorts. Amplifying that scenario in a negative fashion is the point that rising interest rates send corporate bond yields higher, potentially weighing on issuers’ ability to meet obligations.

MGM, Wynn High Leverage Could Be Exposed in Recession

In a note to clients, Wolfe Research analyst Chris Senyek observes that issuers capitalized on low interest rates in 2020 and 2021 to push out maturities. That could reduce vulnerability in a recession, he said.

Still, MGM and Wynn are among 10 companies on Wolfe’s list of firms that have leverage in excess of 3.5x with at least 40% of corporate debt coming due in the next three years. With net debt to estimated 2023 earnings before interest, taxes, depreciation, amortization, restructuring, or rent costs (EBITDAR) of 6.3x, Wynn ranks third on Wolfe’s list.

Forty-eight percent of the operator’s debt comes due over the next three years, and 21% of those bonds are floating rate issues.

MGM is fourth on the list with net debt/2023 estimated EBITDAR of 4.6x and 62% of maturities arriving over the next three years. Just 4% of the Bellagio’s operator bonds are floating rate. MGM and Wynn are the only casino companies on the list, but they are far from the only firms in the industry with substantial outstanding obligations.

MGM, Wynn Have Avenues for Dealing with Debt

Both MGM and Wynn have outlets for reducing debt-induced recession vulnerability. Specific to the Aria operator, it has one of the largest cash hoards in the gaming industry. Its regional casino portfolio could provide some buffer against weakness in Las Vegas, should that scenario come to pass.

Both companies are benefiting from the Macau resurgence, which is of particular importance to Wynn because that firm has just three domestic venues.

Recently, Wynn has found capital markets to be receptive to its debt offerings. Should the Encore operator look for other sources of cash, it could part with its digital gaming unit. However, it hasn’t said that such a move is on the agenda.