DELEVERAGING THROUGH BOND BUYBACK

ASCA, BYD, LVS, MGM, and PNK all have potential debt covenant issues in 2009. BYD and MGM are in the unique position of having the combination of sufficiently lenient credit facility covenants and significantly discounted subordinated debt. Both companies can de-lever by borrowing off their credit facilities to buy back discounted sub debt and retiring it. Both can also sell assets and use the proceeds to retire sub debt subject to certain conditions.

By way of example, MGM borrows $100 million from its credit facility and buys $154 million par value debt trading at 65. The company would have to pay taxes on the gain of $54 million at the ordinary rate, say 35%. Thus, on a net basis, MGM would be deleveraging at $35 million ($54 million less taxes of $19 million) for every $100 million in bank borrowing used to repurchase sub debt. Nobody likes to pay taxes but the penalties of a covenant breach are much more severe.