CITYCENTER “CURED” BUT MGM STILL AN OPTION

 

Yesterday after the close, MGM announced an agreement with Dubai World and CityCenter's lenders to complete the funding of CityCenter.  MGM also announced another amendment to its credit facility.  Although neither of these agreements solves MGM's broader credit issues, they do put the CityCenter issue to bed.  We continue to view MGM equity as an option and to the extent they can extend the duration of that option, the stock will rise.

 

Terms of the revised CityCenter agreement:

  • Dubai World and MGM will fund their remaining equity contributions through letters of credit
  • CityCenter's lenders will immediately fund the full $1.8BN facility
  • Dubai World was relieved of all completion guarantees in return for paying $135MM of contribution made by MGM on its behalf and dropped its suit against MGM
  • MGM is now solely responsible for the completion guarantee of up to $1.2BN should the construction budget exceed $8.5BN and net condo proceeds fall below $243MM
  • Interest rate margin increased by 200bps, though payment are "PIK" (paid in kind) through 9/2010
  • Condo proceeds up to $250MM may be used towards construction costs; 30% of net proceeds in excess of $250MM will go towards debt reduction, while the remaining 70% will be distributable subject to certain performance criteria satisfaction
  • Certain financial covenants were also loosened
  • Facility matures June 30, 2012

Essentially MGM's only incremental cost for this amendment was the guarantee and $18MM in incremental annual interest ($36MM for the JV).  According to its 10K, MGM estimated it would need to fund $319MM of its $600MM guarantee, translating to $638MM without Dubai World's share.  However according to our math, MGM will likely not have to fund any of the guarantee.  MGM's estimated total construction budget was $8.7BN on its last conference call.  Management also believed that they could save an incremental $200MM of costs, bringing the total cost pre-condo sales to $8.5BN.  In addition, MGM had $1.6BN of contracted condo sales of which they estimated 75% would close, bringing the net cost comfortably below their completion guarantee trigger.

 

MGM also announced another amendment to its credit facility:

  • Additional 45 day waiver of its covenants through June 30, 2009
  • Allows MGM to make its remaining equity contributions to CityCenter through the issuance of a $224MM letter of credit
  • Permitted MGM to enter into revised CityCenter completion guarantees

 

In return for this amendment MGM:

  • Reduced borrowings and commitments under the facility by $100MM
  • Provided the banks additional collateral:  Gold Strike Tunica, MGM Grand Detroit, certain undeveloped land on the Las Vegas Strip, and to secure debt under the facility in an amount up to $300 million

 

Interestingly, this additional collateral does not count against MGM's ability to secure an additional $1.7BN from its $3BN basket.  The bank agreement permits granting security in assets that fall under a certain threshold (2% of net tangible assets) and MGM Detroit is also carved out in its credit agreement.

 

We believe the next steps for MGM will involve some combination of the following:

  • Exchange offer for the 6% Senior Notes due Oct 2009 ($820.9MM O/S as of 12/31/2008)
  • Exchange offer the 9.375% and 8.5% notes due in 2010 (Approx $1BN)
  • Sale of Beau Rivage and/or MGM Detroit
  • Equity raise ($500MMish...)
  • Secured note issuance
  • Pledge of additional collateral to banks in exchange for covenant relief and additional waivers

 

We expect the stock to open higher as MGM has extended the duration of its equity option. 


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