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Valuation may be high but the short side looks way too dangerous.

Today’s CityCenter refinancing is certainly a positive for MGM.  Other upcoming catalysts include a likely decent Q1 owing to easy convention comparisons in Vegas and sustainable, estimate-beating profitability in Macau.  We acknowledge the hefty valuation and leverage, negative cash flow, and still uncertain intermediate term in Las Vegas.  However, a huge short interest and upcoming positive catalysts leave us on the sidelines, for now. 

MGM just completed its refinancing of CityCenter and announced it this morning.  As most investors know, City Center’s existing $1.8BN credit facility needed some reworking given the ‘onerous’ covenants that are set to kick in June 2011.  

This morning MGM announced the pricing of $1.5BN first and second lien notes. 

  • $900MM First lien bond deal, 7.625%
  • $600MM Second lien bond deal – PIK/Toggle (10.75% cash pay, 11.5% PIK)
    • There are 3 payment options: 100% cash, 50/50, and  100% PIK.  Payment elections are made every 6 months.

MGM also completed extension (2015) and amendment of its bank deal – which is currently being papered.  Earlier this week, the talk was to do a $500MM first lien deal and a $900MM first lien bank deal.  However, demand for the bond deal was strong, and therefore the bank deal got reduced to $500MM with pricing at L + 650bps (1% Libor floor), for an aggregate ‘New’ City Center financing of $2BN. 

The reason why the ‘New’ deal is larger than the existing deal is because of the negative cash flow of the City Center assets, MGM needs to set aside approximately $160MM in escrow for interest payments.

Other details of the new financing include:

  • Excess cash sweep– 75% of excess cash goes to reduce principal of the first lien bank piece.  Excess cash also includes any proceeds from asset sales.
    • If they sell Crystals – proceeds go to the banks
    • Proceeds from the sale of condos, after repaying MGM’s ~$200MM intercompany loan, go to the banks

Given the strong demand for the notes, the pricing came in about 100bps tighter than price talk.  We’re also surprised that given the superior terms of the first lien bank deal that the pricing is only 12.5bps wider than the 1st lien bonds, however, this is because the bank piece was only offered to relationship banks.  Looks like MGM/CityCenter got a pretty good deal.