MGM Mirage’s cash crunch

By Liz Benston

Tuesday, March 3, 2009 | 2 a.m.

Just months ago MGM Mirage, with billions of dollars in cash at its disposal, was thought to be well braced for the recession.

But last week’s news that MGM Mirage has tapped the remaining money from a $4.5 billion credit line is adding anxiety among investors for the company’s future.

And in a sign of how swiftly the nation’s economic headwinds have stiffened, analysts now say Nevada’s largest employer is at risk of filing for Chapter 11 bankruptcy protection as it enters the final stretch of building the $9 billion CityCenter. Major loans are coming due over the next two years even as the company is on the hunt for another $1.2 billion to finance completion of the project.

MGM Mirage spokesman Alan Feldman declined to comment on bankruptcy concerns or to elaborate beyond the company’s announcement Friday.

Analysts say there is a slim chance that, because of dwindling cash, MGM Mirage will have to delay completion of CityCenter.

One well-placed source said that was one of many possibilities being considered by the company until banks free up money.

But Feldman said that with the exception of the Harmon hotel, which is expected to open in 2010, MGM Mirage “continues to work on CityCenter” for a late 2009 opening. Dubai World remains a committed partner, he added.

The company has not yet reported fourth-quarter earnings. In the third quarter, which worsened from the first and second quarters, earnings fell about 30 percent from a year earlier. Including the effect of cost cuts and removing one-time events that don’t relate to performance, earnings fell about 14 percent in the third quarter.

That hardly sounds like a doomsday scenario for a company that generates more than $6 billion in cash each year.

And yet, it’s bad news for MGM Mirage, which has billions more in loans coming due in the next few years while trying to borrow more money in the tightfisted capital market.

MGM Mirage has $1.3 billion in bonds due in 2009 and another $1.2 billion in bonds due in 2010. On top of that, the company has a $7 billion bank loan coming due in 2011, along with another $532 million in bond maturities.

That’s why the three major bond rating agencies, which assess bankruptcy risk, jumped at MGM Mirage’s announcement Friday that the company would borrow $842 million in cash remaining under a $4.5 billion revolving credit line because of the turbulent credit markets and “uncertain state of the global economy.”

MGM Mirage stock plunged to an all-time low of about $3 per share Monday, down about 95 percent from a year ago.

The rating agencies, fearing that MGM Mirage is burning though the cash it needs to pay mounting debts, said it is running out of options to secure additional money.

“It’s unfortunate that the company has so many near-term maturities at a time when earnings are so weak and the credit markets have seized up,” said Peggy Holloway, vice president and senior credit officer of Moody’s.

Standard & Poor’s and Fitch Ratings said MGM Mirage is likely to default on its bank loan this year because the company’s debts are too high, relative to earnings.

Although such defaults don’t necessarily lead to an immediate Chapter 11 filing but rather a new round of bank negotiations, some analysts say the company’s debts are so massive it may need to restructure them, which is most efficiently done in bankruptcy court.

Unlike other industries, where assets are commonly liquidated to pay creditors, major Las Vegas casinos have continued to operate in Chapter 11, either under the same owners or new owners. Lenders sometimes receive equity in a company as debts are forgiven.

Even if the company obtains waivers from its banks, amends the terms of its loan or obtains the remaining cash needed for CityCenter, the company’s capital structure “may be unsustainable” given deteriorating business trends in Las Vegas, Fitch Ratings said in downgrading the company’s credit ratings Friday.

Fitch expects business to remain poor on the Strip throughout 2009 and likely into 2010. S&P forecasts a 25 percent drop in company earnings this year.

Typically, banks will negotiate with companies to amend the terms of their bank agreements with the understanding that a company can still generate significant cash to pay debts, though perhaps not as much as before. MGM Mirage and other casino companies have negotiated such amendments during the downturn, allowing them to incur higher debts in exchange for a higher interest rate.

The company has cut costs by hundreds of millions of dollars — a reaction to slower business as well as a recognition of future cash needs.

As the economy worsens and banks face their own mortality, analysts say they will be less likely to negotiate with companies that need cash the most. Analysts say MGM Mirage is negotiating with its banks and considering selling casinos to raise money.

Delaying the opening of CityCenter would make sense only if the company thinks revenue in the down economy would not sustain operating costs — an unlikely scenario, experts say.

On the other hand, MGM Mirage may have few options if it is unable to secure $1.2 billion in financing needed to complete the project and 50 percent owner Dubai World — facing its own concerns as the global downturn cools Dubai’s red-hot real estate market — is unwilling or unable to put in more equity.