I’m not sure this massive gaming short squeeze is over. As we predicted and discussed in our 10/29/08 post “A SHORT SQUEEZE COMMETH”, there is a heavy short interest in the space to work through and some near term positive catalysts. However, when the dust settles, investors will be left with a choice: Those companies that proactively managed their balance sheets and liquidity and those that were forced to react. We put PENN, BYD, and WYNN in the former category and ASCA, LVS, and MGM in the latter.
Yesterday, MGM announced a $750 million senior note deal priced to yield 15%. The proceeds will likely go immediately to pay off some of the company’s 4-5% credit facility. That is an ugly, but apparently necessary spread that will cost the company about $0.15 in annual EPS or 11% of 2009 estimated EPS.
The contrast is striking. It’s entirely fitting that MGM closed this deal the same day PENN received the final $775m payment from Fortress of the total $1.45bn owed. PENN now sits at 2.5x leverage with huge liquidity while MGM is levered at 6x. It’s also the same day that WYNN released earnings and provided an in depth discussion of its massive liquidity including $1.7bn of cash on hand.
The end of the easy money is indeed over and those companies that egregiously exploited the environment to borrow at unsustainable rates and invest in low ROI projects are now paying the price. Over-earning is a theme that we’ve hit on for some time and we are now getting a clearer picture of the true earnings power of these companies.