MGM: POTENTIAL CITYCENTER BANKRUPTCY

Last night the WSJ stated that CityCenter is preparing for a potential bankruptcy filing of CityCenter, as the $220MM funding payment due today looks unlikely to be made. This news comes on the heels of Dubai World filing a lawsuit against MGM this Monday alleging that MGM's admissions in its 10-K constitute a breach of the CityCenter Joint Venture Agreement and puts the CityCenter development project at risk.

Our take on the lawsuit is that Dubai was simply taking precautions given the cross-default provision in the CityCenter financing which would be triggered by a default on MGM’s credit facility. We also believe that this may have been the first step in a series of moves for Dubai World to try to take a larger stake in CityCenter and possibly remove the cross-default risk. And as we wrote about in previous posts, while we do not believe it is likely that MGM will file for bankruptcy protection this year, we have little doubt that, barring a transaction, they can avoid a technical default.

The preparation for a filing of CityCenter looks like it’s the next step in this dance. We believe that perversely, a filing of CityCenter is a positive for MGM credit and equity. The filing will at least delay $500MM of funding that MGM needs to contribute to CityCenter in 2009, and roughly $200-300MM of incremental funding in 2010. If CityCenter does not open it would also relieve competitive pressure on MGM’s other casino assets in Vegas. However, given the scope of the project and the 10,000 employees that would be out of work should it not open, we believe that the local and possible federal (Mr. Reid?) government may not let this project fail.

The other issue is the completion guarantee provided by both parties ($600MM in addition to the required equity contribution). For MGM this guarantee is a large contingent liability in CityCenter bankruptcy. Additionally, as we learned from LVS, halting construction isn’t cheap either. Finally, it is possible that Dubai World may have funding issues; the financial state of the company is unclear.

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