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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.

European Data Download: Inflation Pushing Higher

Position: Long Germany (EWG); Short Italy (EWI) and Euro (FXE)


European equity markets are trading down today across the board after two days of strong performance. FTSE -0.7%; DAX -0.3%; CAC -0.1%. The PIIGS are currently trading higher than their morning open of ~ -100bps, however Portugal’s equity market is flashing a negative divergence at -1.1%.



The Key Story is the Inflection in Inflation Expectations:


Today European Central Bank council member Axel Weber said the "economic outlook in the euro area has improved markedly and inflation risks could increase." This comes on the heels of ECB President Jean-Claude Trichet saying yesterday that he’s willing to raise rates to fight inflation.


CPI Data out today confirms these inflationary pressures: Spain saw a significant gain and inflation pushing higher in the UK will put further pressure on the BOE to act (see chart below). 


Germany CPI: 1.9% in Dec. Y/Y (Final Reading)   vs. 1.6% in November (the fastest acceleration in more than two years)


Spain CPI: 2.9% Dec. Y/Y (Final Reading)   vs. 2.2%


Eurozone CPI : 2.2% in Dec Y/Y (Final Reading)    vs. 1.9%


UK PPI Input: 3.4% in Dec. M/M     vs 0.9%

                                12.5% in Dec. Y/Y    vs 9.2%


UK PPI Output: 0.5% in Dec. M/M    vs 0.4%

                                4.2% in Dec. Y/Y   vs 4.1%


European Data Download: Inflation Pushing Higher - UKPPI



EU Car Demand Low:


In contrast to Weber’s economic outlook, a report on EU (25 countries) New Car Registrations out today fell -3.2% in December versus -7.1% in November and largely reflected difficult comps due to strong demand last year associated with country-specific “cash (subsidy) for clunkers” programs throughout Europe, according to the European Automobile Manufacturers’ Association.


The highlights of the report include:

  • Ford Motor Co., Fiat SpA and Toyota Motor Corp. led a ninth consecutive monthly drop in European auto sales
  • Ford’s registrations plunged -26% in December Y/Y; Fiat’s -19%; and Toyota’s -7.6%
  • Demand in the region fell 2.7% percent to 1.05 million, however December registrations rose 6.9% in Germany, Europe’s biggest market

We continue to remain bullish on Germany, and are currently long the country via the etf EWG in the Hedgeye Virtual Portfolio.



Euro Strengthening:


The euro got a further lift today against major currencies, including the USD, currently trading at $1.3386, after comments today from French Finance Minister Christine Lagarde that Europe is "looking at raising the EFSF (the bailout fund) and is considering broadening the scope of the fund’s powers."


From a catalyst perspective we continue to believe that European markets and the euro will be supported over the near-term by discussion next week in Brussels by European finance ministers on initial details of a more "comprehensive (bailout) package". Further, German Finance Minister Wolfgang Schaeuble said yesterday that the EU member states will assemble this package by March when EU leaders are schedule to meet for a summit. 


We’ll continue to keep you ahead of Europe’s sovereign debt issue. As soon as next week we could learn considerably more about funding for future country bailouts.  


Have a nice long weekend,


Matthew Hedrick




Some news items and notable price moves in the past 24 hours:

  • CAKE  performed strongly on yesterday’s upgrade.
  • TXRH had positive commentary at the ICR conference, announcing plans to open 20 new restaurants in 2011.
  • CMG outperformed on accelerating volume also following an upgrade by Miller Tabak and CEO Steve Ells presented at the ICR conference.
  • BWLD outperformed casual dining on accelerating volume.  Canada-based Wild Wing Restaurants Inc. has filed suit against BWLD as they attempt to stop the company using its name in Canada.  BWLD plans to open 50 to 70 new locations in Canada over the next five years.
  • KKD CEO stated that rising commodity prices are the biggest “external challenge” to his company, in an interview Thursday with CNBC.   He also said that he has a plan to offset them.



Howard Penney

Managing Director


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McDonald's should pull focus back to burgers

CHART OF THE DAY: American Sacrifice



CHART OF THE DAY: American Sacrifice -  chart of the day

Chirp, or Be Chirped

“The fact that we are today to debate raising America’s debt limit is a sign of leadership failure.”

-Senator Barack Obama, March 2006


Our CEO Keith McCullough has been out most of this week recovering from a surgery to reattach his Achilles tendon.  I’ve known Keith for upwards of fifteen years, including three years as college hockey players, so I can rightly say that I’ve seen the man in a few precarious situations, but never did I think he would injure himself on the squash courts.  So when it comes to risk management for the aging college athlete, leave the squash to those that grew up playing it at prep schools is my advice on a go-forward basis.


With Keith out, I’ve had to live a week in his shoes.  I’m not prone to giving the proverbial tire pump, but, candidly, it’s not easy to write a morning strategy note and prep for a morning call every morning starting at 5 a.m.  As it relates to President Obama and the quote above, I think he is now realizing what it’s like to live in another man’s shoes, as well.   (Life as President is much different than as a member of Congress it seems.)


Members of Congress in Washington basically have free rein to chirp.  While Presidents can chirp as well, they also have to make decisions.  Obama’s quote (chirp) above was prescient back in 2006, but in the coming weeks he will have to push to get the debt ceiling raised because, as President, he needs to keep the country running.  The advisors hired to chirp on his behalf have been out in full force making sure he has the political cover to get this done.


Specifically, White House economic advisors Austan Goolsbee recently had this to say about the debt ceiling:


"This is not a game. You know, the debt ceiling is not something to toy with. … If we hit the debt ceiling, that's essentially defaulting on our obligations, which is totally unprecedented in American history. The impact on the economy would be catastrophic. I mean, that would be a worse financial economic crisis than anything we saw in 2008."


Now, if that’s not chirpy, I don’t know what is.


Freshman Senator Rand Paul was not to be outdone though, and chirped back his own proposal:


“I can't imagine voting to raise the debt ceiling unless we're going to change our ways in Washington. I am proposing that we link to raising the debt ceiling — that we link a balanced budget rule, an ironclad rule that they can't evade.


We have to change the rules and we have to say to Washington, Balance the budget. You have to do it by law.  And then I'll vote to raise the debt ceiling.  But only if we have an ironclad balanced budget rule that we attach to the debt ceiling.”


Ironically, the best assessment of the debt and debt situation was probably Senator Obama back in 2006.  The fact is that we are in this fiscal situation today because of failed leadership.  This is failed leadership that has transcended administrations and political parties. It is because the United States has created long term obligations in the way of social security and healthcare that we can’t fulfill, and administrations have overspent on discretionary items when times were good.  (In fact, our friend Karl Rove even acknowledged to us that the one regret he had was that the Bush administration didn’t do a better job on discretionary spending.)


In the coming weeks, the debate over the debt ceiling will increase in velocity and volume.  The fiscal conservatives, particularly those who were swept in with the Tea Party in the most recent midterm, will be on the soap box and will be chirping like never before.  Unfortunately, even Goolsbee’s language and delivery is somewhat inflammatory, and as a nation, we really have no choice, but to increase the limit on the debt ceiling.


In the coming months, there are three key catalysts that will take the debate over the debt and deficit to a heightened level, these are:


1)      Late January - Congressional Budget Office deficit projections will have to be raised dramatically for the next few years.  We’ve highlighted their projections in the Chart of the Day, and, simply put, the numbers are too low for what we’ve already seen in Q1 of fiscal 2011.


2)      Mid February - President Obama’s draft budget proposal will be submitted in early February.  This proposal will be more heavily scrutinized than any budget in recent memory and since so few of the line items can be played with in the short term, they’ll surely not satisfy the fiscal conservatives.


3)      Early March - Finally, the vote on the debt ceiling will occur sometime before March 4th.  This is when the debate will reach its highest pitch even though the outcome is already known, which is the ceiling must go higher.


We believe the outcome of all of this could be, American Sacrifice. This is the idea that this debate actually drives our politicians to implement meaningful initiatives that will begin to reverse the fiscal predicament we are facing.  If we do start to see fiscal improvement, or at least positive discussions in that direction, it will be bullish for the U.S. dollar.


That said, as it relates to Washington, one never knows and productive legislation will actually require these politicians to set aside their “chirp, or be chirped” politicking, and help move the country forward.


Yours in risk management,

Daryl G. Jones


Chirp, or Be Chirped - Chirp

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