MGM: NO REAL SURPRISES HERE

MGM filed a Form 12b-25 Notice of Late Filing with the SEC. In the document they indicated:

1. The instability of the credit markets and the overall economy combined with the recent $842 million drawdown has delayed MGM’s ability to assess its financial position and thus, its ability to file.
2. MGM was in compliance with its financial covenants under its credit facility as of 12/31/08.
3. MGM will likely not be in compliance with those covenants in 2009.
4. The 2008 financial statements will likely contain an explanatory paragraph with going concern language.
5. The company will record a pre-tax gain of $87 million related to repurchase of debt at a discount.

The biggest takeaway in this SEC filing is that MGM likely won’t be filing Chapter 11 any time soon. MGM is negotiating a waiver or an amendment with the banks on the leverage covenant. The question is do the banks really want to throw MGM into bankruptcy? Do they really want to own the assets? The likely answer is no on both so they may be pretty flexible with regards to the covenant.

The other useful piece of information was the gain on the repurchase of MGM’s bonds. We calculate the company spent $125-140 million to buy back $215-230 million face value of bonds. Obviously, these were deleveraging transactions.

What a week for MGM shareholders. Every day it seems like there is a new development to spook the markets. First, it was the drawdown. Then, the Las Vegas Sun published an article discussing the Chapter 11 potential. Finally, MGM filed a sparsely worded SEC document with that scary “going concern” wording but containing no information that should surprise people.

With limited information flow, panic has set in. However, MGM has some remedies that will come to light when they finally release earnings in mid-March. Let’s just wait and see.

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