While we believe that CityCenter will succeed in getting an amendment to its credit facility, the road there should be interesting and expensive.
Beginning in June 30, 2011, CityCenter's $1.8BN credit facilities' financial covenants will kick in and barring anything short of a miracle, they will surely not meet the current 5x maximum leverage covenant. Almost all of the gaming amendments that we've seen over the last 18 months have involved a substantial reduction in size, an increase in interest expense, and a host of other restrictions. Given that MGM's current credit facility restricts them from making any material ($50MM limitation) equity investments in CityCenter, and we seriously doubt that Infinity World is chomping at the bit, reducing the facility size is clearly not an option for CityCenter. This may be a positive.
The other issue is that a substantial minority of the CityCenter bank debt holders are funds, which are not interested in the "relationship" or IPO fees and are therefore not as likely to play softball with MGM in the negotiation process. We believe that CityCenter will need to find bank lenders to take out the fund holders as part of the amendment process. This may be just one of the reasons that MGM postponed the IPO of MGM Grand Macau since they need to keep the carrot out there. In addition to finding fresh bank capital, CityCenter may also need to make a number of other concessions to lenders to get an amendment through, including:
- All future cash condo sale proceeds will go toward debt reduction instead of to MGM and Infinity World - not that MGM was likely to see any cash from condo sales in the foreseeable future given that that they had almost $750MM of distributions that needed to be paid out ahead of them
- An agreement to sell the Crystals Mall over the next 18 months with proceeds going towards debt reduction
- Potential sale of non-core assets (i.e. anything but Aria)
- Normally, we would say an increase in interest expense, although in this case at a run rate of $60MM of EBITDA, the property is nowhere close to covering its interest expense
- No distributions to MGM or Infinity World until leverage runs to earthly levels... basically, not anytime in the foreseeable future
In return for these and other concessions, we believe that CityCenter will get a waiver of their financial covenants and possibly another extension of the agreement which expires April 2013.
Bottom line, even if CityCenter EBITDA reaches $250MM over the next few years, MGM or its shareholders are unlikely to see a cent of cash from CityCenter ...paper profits will have to suffice.