MGM Note Offering Increased by 50 Percent Amid Strong Appetite for Gaming Paper

Posted on: April 24, 2020, 09:23h. 

Last updated on: April 24, 2020, 10:05h.

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

MGM Resorts International (NYSE:MGM) priced $750 million worth of senior notes coming due in 2025 on Thursday, a transaction that’s slated to close on May 4.

MGM Senior Note Pricing
Bellagio operator MGM upsized a debt offering, confirming demand is strong for gaming bonds. (Image: Reuters)

Normally, that would be no more than basic corporate news not worthy of closer examination. But with the coronavirus weighing on casino operators, MGM’s note sale is notable because the offering was upsized by 50 percent from $500 million. That indicates investor demand for gaming commercial paper is robust.

The Company intends to use the net proceeds from the offering of the notes for general corporate purposes, including, without limitation, further increasing its liquidity position,” according to a statement.

With gaming companies contending with what is now an extended zero revenue environment, investors are increasingly cognizant of operators’ cash positions. On Thursday, MGM said that as of March 31, it had $6 billion in cash on hand, and that it could tap capital markets for more if necessary.

Demand Is There

MGM isn’t the only gaming that’s recently boosted the size of a corporate debt sale. Earlier this month, rival Wynn Resorts (NASDAQ:WYNN) did the same, increasing the scope of a private debt sale to $600 million from $350 million.

The debt sales are useful for operators because, as all domestic casinos remain closed, no money is coming. But companies must still tend to high fixed costs. However, the offerings have a disadvantage, too. While sellers get much-needed capital to cover cash burn rates, their debt leverage ratios increase, meaning that if they need to sell more debt in the future, it’ll likely be of lower credit quality and with higher interest expense.

Moody’s Investors Service rates MGM’s latest issue Ba, the third-highest junk mark, with a “negative” outlook.

“The negative outlook reflects the uncertain duration and recovery from the coronavirus-related earnings and cash flow pressure, which will lead to higher debt (from the revolver draw or other debt offerings) and leverage even when property earnings recover,” said the research firm. “Earnings will decline due to the disruption in casino visitation resulting from efforts to contain the spread of the coronavirus, including recommendations from federal, state, and local governments to avoid gatherings and avoid non-essential travel.”

Headwinds Abound

MGM, which is one of the most volatile gaming names this year, is expected to report glum first-quarter results when it steps into the earnings confessional on April 30, with the company forecasting a 29 percent drop in revenue and 61 percent plunge in earnings before interest, taxes, depreciation, amortization, and restructuring or rent costs (EBITDAR).

That’s just one example of the adverse impact of COVID-19 on the gaming industry,

“The gaming sector has been one of the sectors most significantly affected by the shock, given its sensitivity to consumer demand and sentiment,” said Moody’s. “More specifically, the weaknesses in MGM’s credit profile, including its exposure to travel disruptions and discretionary consumer spending, have left it vulnerable to shifts in market sentiment in these unprecedented operating conditions, and MGM remains vulnerable to the outbreak continuing to spread.”