Thursday, December 8, 2022

Macau Weighs On MGM Credit Profile, Says Fitch Ratings

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Posted on: May 12, 2022, 11:27h. 

Last updated on: May 12, 2022, 11:27h.

MGM Resorts International (NYSE:MGM) still faces regulatory uncertainty in Macau and that’s prompting Fitch Ratings to maintain a “negative” rating watch on the casino operator.

MGM Macau
The MGM Grand in Macau. FItch sees risks for the operator in the Chinese territory. (Image: CNBC)

The research firm also pulled its credit rating on the gaming company. MGM owns about 56% of MGM China, which controls two integrated resorts in the world’s largest casino hub. While concession renewal risk is low, Fitch voices concerns on “the possibility of weaker operating economics, onerous capital commitments, and reduced ability to upstream cash to parent entities.”

Macau’s gaming industry is slumping and rebound projections are consistently extended as the Chinese Communist Party (CCP) implements a widely criticized zero tolerance policy on the coronavirus.

Fitch continues to forecast 2022 to be another challenging year for Macau’s gaming revenues given visitation volatility stemming from China’s pursuit of a ‘zero-COVID’ policy,” notes the credit ratings agency.

Fitch previously had a “BB-“ grade on MGM debt — a junk rating.

Fitch Sings Familiar Tune on MGM

Fitch’s view on MGM is a familiar one in the gaming industry and one that date backs to the initial reopening phase in 2020.

Operators that have robust Las Vegas footprints and extensive regional portfolios to go along with Macau exposure are leveraging domestic strength to offset some of the weakness at their venues in the Chinese territory.

As the largest operator on the Strip and the company behind eight regional gaming destinations, MGM checks those boxes.

“Domestic gaming has fully recovered to 2019 levels in regional markets and Las Vegas continues to exhibit strong domestic gaming demand and visitation trends,” adds Fitch. “The strong performance in Las Vegas, both slots and table games, is offset by the still recovering international and convention segments, although the latter will come back more in earnest in second half 2022.”

The research firm estimates MGM’s regional casinos will modestly surpass 2019 levels this year with Las Vegas fully recovering in 2023.

MGM Financial Flexibility

At the end of the first quarter, MGM had $2.9 billion in cash (including restricted cash) and $1.6 billion in revolver availability while MGM China had $288 million in cash and $1.3 billion in revolver availability.

While Fitch credits the gaming opportunity for possessing a favorable asset mix and a series of transactions that raised capital, the ratings agency also points out the operator created significant long-term lease debt by selling essentially all of its meaningful property assets.

MGM “created $4.3 billion of lease-equivalent debt in the process. The CityCenter & Cosmopolitan transactions in 2021 also created another $3.3 billion in lease-equivalent debt,” said the research firm.

The recently completed sale of MGM Growth Properties to VICI Properties (NYSE:VICI) generates $4 billion in proceeds for MGM that can be used to pare debt.  Fitch sees MGM’s gross adjusted leverage heading below 6x next year, putting it on pace to reach management’s state goal of gross adjusted leverage of 4x to 5x.

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