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It’s probably just a coincidence but John Ensign, Senator from Nevada, sponsored Senate Bill 33 which would provide tax relief to companies that are restructuring debt. Clearly, a primary beneficiary of this bill is the gaming industry in general, and MGM and BYD in particular (both headquartered in Las Vegas).

As we’ve written about extensively, many gaming companies are overleveraged and face the risk of breaching credit facility covenants. ISLE, MGM, and BYD all have the wherewithal to pursue a strategy of buying back their discounted debt to de-lever. The only drawback to this strategy is the tax implications, whereby the company must pay a tax on the amount of the discount at its ordinary corporate tax rate.

We are unsure of the prospects of SB33 passing but for legislators in favor of throwing companies a lifeline to avoid bankruptcy, there should be some appeal. As we wrote about in “THE GREAT WEALTH TRANSFER”, the buyback of discounted bonds creates equity value. Eliminating the tax burden on such a transaction creates even more equity value. We’ve updated the example from our previous post to provide a third, tax-free assumption. In this example, an additional $29 million on top of the original $51 million of equity value is created with the repurchasing $200 million par value of bonds. Very compelling, indeed.

MGM looks like the biggest winner here should this bill become law.