MGM Mirage gets debt waiver, swings to quarterly loss

By Liz Benston, Amanda Finnegan

Published Tuesday, March 17, 2009 | 2:42 p.m.

Updated Tuesday, March 17, 2009 | 6:28 p.m.

MGM Mirage today reached an agreement with bank lenders that will give the company more time to figure out a solution to the company's cash crunch.

Instead of granting bank lenders collateral in the company's assets – one of many scenarios contemplated by lenders in the downturn – MGM Mirage has agreed to repay some of the money it owes and pay a higher interest rate.

"It could have been contentious. It could have failed, but it was not," MGM Mirage Chairman and Chief Financial Officer Jim Murren said Tuesday during a conference call to discuss the company's fourth quarter earnings. "This is just the first step but an important step toward a long-term solution to our liquidity issues."

Also today, MGM Mirage reported one of its worst financial quarters in more than a decade. The company posted a loss of $1.1 billion, or $4.15 a share, for the fourth quarter of 2008, compared to an $872.2 million profit, or $2.85 a share, during the same period a year earlier. Total revenue fell 15 percent to $1.8 billion over that period.

Room revenue across the company’s properties fell 21 percent in the fourth quarter. Average daily room rates at MGM Mirage’s Las Vegas properties fell 15 percent to $133 from $156. The company’s average room occupancy dropped to 85 percent, compared to 93 percent in the same period last year.

Gaming revenue decreased 17 percent in the quarter.

This waiver announced Tuesday appeases creditors who are owed billions of dollars and will be in a position to demand immediate repayment this year, as the company is likely to default on certain financial requirements.

MGM Mirage said bank lenders have agreed to waive those requirements until May 15.

One of these requirements, which is proving a problem for many gaming companies in the downturn, is that company debt be manageable relative to earnings. MGM Mirage said it is expected to default on these financial requirements as of the end of this month. That could trigger payment on the company's debts, including money raised for the company's CityCenter joint venture.

The company said it risks defaulting on these financial requirements after the May 15 deadline.

In exchange for the waiver, MGM Mirage said it will pay $300 million that is owed on its senior secured credit facility and pay a higher interest rate on that piece of debt. The temporary waiver also includes a prohibition on new investments, accumulating additional debt and the sale of casino properties.

Some investors say the company is running out of options. Even if negotiations with banks buy more time, MGM Mirage's best option may be seeking Chapter 11 bankruptcy protection from creditors, they say.

Today, Murren said the company's relationship with bank lenders goes back more than a decade, with many banks also underwriting the company's bonds. He called recent negotiations "constructive" and "friendly".

Some observers say bondholders will be more willing to negotiate other options rather than force the company into bankruptcy court, where they are likely to receive cents on the dollar. Bondholders could receive bonds with longer maturity dates at higher interest rates – an option explored by competitors. But that might be a band-aid approach to a bigger cash flow problem, critics say.

Murren said the company is "considering all our options and are committed to finding the best solution" – including raising additional debt and equity, modifying credit agreements and selling properties.

"I have no illusions that this is going to be easy," he said.

Executives also said the company is committed to opening CityCenter in stages, as planned, starting late this year.

Delaying or slowing down CityCenter by a few months to wait for better times would be an ineffective and inefficient bet in an uncertain economy, CityCenter Chief Design and Construction Officer Bobby Baldwin said today.

Addressing concerns about souring demand for condos and a lack of financing for condo-hotel units, Baldwin said he expects at least 75 percent of CityCenter’s condominium purchase contracts – which now total $1.6 billion in contracted sales – to close escrow beginning in the fourth quarter. Some buyers intend to pay cash for their units, he said.

MGM Mirage must put $500 million in equity into CityCenter, which it owns with joint venture partner Dubai World. Murren said Dubai World executives remain “steadfast partners” who are sympathetic to the company’s troubles in the global downturn. More than $1 billion in financing is still needed to finish CityCenter.

After recent cost savings, CityCenter’s construction budget has fallen from more than $9 billion to $8.7 billion.

MGM Mirage has cut about $700 million in operating costs from the business since it began a cost-savings program last year. Most of those cuts represent permanent changes in how the company does business rather than temporary trims in payroll or other volume-related expenses, Murren said.

The company will only spend $200 million on capital improvements related to property maintenance this year, down from highs of several hundred million dollars in previous years.

In a separate earnings announcement, MGM Mirage said it continues to achieve high rates of hotel occupancy in the poor economy by lowering room rates.

Non-gaming revenue, excluding rooms, fell 9 percent – the lowest of any category. New entertainment options are driving revenue, the company said.

MGM Mirage recently opened a new show at The Mirage with Terry Fator and will begin performances of “The Lion King” at Mandalay Bay in May.

Last year, revenue at MGM Mirage fell 6 percent to $7.2 billion as a result of decreases in market conditions, the company said.

MGM Mirage shares were down nearly 6 percent in normal trading on the New York Stock Exchange, then dropped about 2.6 percent in after-hours trading. The company’s announcements came after the closing bell.