I’ve got to give credit where credit is due. Up until recently, we’ve been highly critical of this management team for exploiting the easy money era without the proper risk management strategy. They’ve dug a pretty massive hole of debt, covenants, capex, and a lack of liquidity. However, it’s time for redemption and MGM is off to a good start.

As best as we can figure out, here is the three pronged strategy:

1. Sell off assets – TI should close in Q2 but there may be others (The Mirage?). This is not, in and of itself deleveraging, particularly with the huge tax bite, unless the proceeds are used to buy discounted sub debt. See #2 below.
2. Buy back heavily discounted subordinated bonds – As we discussed in our 12/17/08 post, “MGM: UPON FURTHER REVIEW”, buying back its own discounted bonds is a deleveraging transaction by the amount of the discount. Buy at 65 and retire at par. Thankfully, MGM’s credit facility allows it to buy back sub debt with the proceeds of asset sales.
3. Cut Capex – For the second time in the last few months, MGM downsized CityCenter Capex, this time by $200 million to go along with the $400 million cut announced during the Q3 earnings release. You can bet MGM isn’t buying many slot machines either.

We calculate this strategy will carry MGM through 2009, but just barely, as the chart shows. Our projection assumes $1 billion in cash spent for bonds at 65 cents on the dollar. The company will come dangerously close to breaching the leverage covenant in Q3. However, if they can close another sale, such as The Mirage by the end of Q3, and use some of the proceeds the buyback more bonds, they should clear the covenant fairly easily.

This strategy can only take MGM so far. The company will run out of availability on its credit facility to buy enough bonds to avoid a 2010 covenant breach. However, buying time is critical. Much can happen in a year including a more favorable refinancing environment, improved operating conditions, etc.

Q3 is tight unless they can sell The Mirage or another asset

Who's Right? The Stock Market or the Bond Market?

"As I see it, bonds look like they have further to fall, while stocks look tenuous at these levels," writes Peter Atwater, founder of Financial Insyghts.

read more

Poll of the Day: If You Could Have Lunch with One Fed Chair...

What do you think? Cast your vote. Let us know.

read more

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