MGM: UPON FURTHER REVIEW

After scratching our heads about why MGM would take such a big tax hit to sell TI, we have dug a little deeper. We now believe MGM may be actively buying its deeply discounted bonds back in the open market. While such a strategy triggers another taxable event, it also allows the company to de-lever at the tax affected discount since they are retiring the bonds at par. Strangely, the credit facility and the recent $750 million note agreements place few restrictions on the company from buying back subordinated debt.

The TI transaction will not close until Q2 2009 but MGM maintains undrawn capacity on its revolver that can be used to buy back bonds currently. We’ve spent a lot of time analyzing this situation and there are many moving parts, but we estimate the company could buy back $600 million worth of bonds at 65 through Q2 2009 to escape breaching its leverage covenant. However, the covenant issue could still resurface again in Q3. For this reason, we think there is a decent probability MGM pursues yet another asset sale. Selling its 50% share of Borgata to BYD is high on our likelihood list.

So where does this leave MGM’s equity? Another asset sale would certainly be a near term positive as the company would buy more time through 2009. The perception of covenant/liquidity relief is a big positive for MGM’s equity. The stock is still down 85% on the year despite the recent sector move higher. The long-term problem is that MGM will still face covenant issues in 2010 and still must close on the asset sale. It is in the company’s best interest to enhance the stock price to raise equity. Look for another asset sale in the coming months and a subsequent equity raise. Land sales are also a de-leveraging opportunity although finding buyers has been a struggle.

These actions by MGM could renew focus on the sector. Transactions, activity in the bond market, and improved liquidity are probably good for the entire beaten down gaming sector, bonds included. The bulls may be in charge for a while in this space.


Revised to reflect repurchase of discounted debt

Are Millennials Actually Lazy, Narcissists? An Interview with Neil Howe (Part 2)

An interview with Neil Howe on why Boomers and Xers get it all wrong.

read more

6 Charts: The French Election, Nasdaq All-Time Highs & An Earnings Scorecard

We've been telling investors for some time that global growth is picking up, get long stocks.

read more

Another French Revolution?

"Don't be complacent," writes Hedgeye Managing Director Neil Howe. "Tectonic shifts are underway in France. Is there the prospect of the new Sixth Republic? C'est vraiment possible."

read more

Cartoon of the Day: The Trend is Your Friend

"All of the key trending macro data suggests the U.S. economy is accelerating," Hedgeye CEO Keith McCullough says.

read more

A Sneak Peek At Hedgeye's 2017 GDP Estimates

Here's an inside look at our GDP estimates versus Wall Street consensus.

read more

Cartoon of the Day: Green Thumb

So far, 64 of 498 companies in the S&P 500 have reported aggregate sales and earnings growth of 6.1% and 16.8% respectively.

read more

Europe's Battles Against Apple, Google, Innovation & Jobs

"“I am very concerned the E.U. maintains a battle against the American giants while doing everything possible to sustain so-called national champions," writes economist Daniel Lacalle. "Attacking innovation doesn’t create jobs.”

read more

An Open Letter to Pandora Management...

"Please stop leaking information to the press," writes Hedgeye Internet & Media analyst Hesham Shaaban. "You are getting in your own way, and blowing up your shareholders in the process."

read more

A 'Toxic Cocktail' Brewing for A Best Idea Short

The first quarter earnings pre-announcement today is not the end of the story for Mednax (MD). Rising labor costs and slowing volume is a toxic cocktail...

read more

Energy Stocks: Time to Buy? Here's What You Need to Know

If you're heavily-invested in Energy stocks it's been a heck of a year. Energy is the worst-performing sector in the S&P 500 year-to-date and value investors are now hunting for bargains in the oil patch. Before you buy, here's what you need to know.

read more

McCullough: ‘My 1-Minute Summary of My Institutional Meetings in NYC Yesterday’

What are even some of the smartest investors in the world missing right now?

read more

Cartoon of the Day: Political Portfolio Positioning

Leave your politics out of your portfolio.

read more