Resorts World Invests In MGM Mirage

On The Financial Edge Daily: RWB subscribes US$50m MGM Mirage's notes

• RWB subscribes US$50m MGM Mirage's notes
  Written by Joy Lee
  Wednesday, 20 May 2009 22:39
  
  KUALA LUMPUR: Resorts World Ltd, an indirect wholly-owned subsidiary of Resorts World Bhd (RWB), has completed the subscription of US$50 million (RM176 million) of senior secured notes issued by MGM Mirage, Inc.
  
  The notes comprise US$25 million 10.375% notes due in May 2014 and US$25 million 11.125% notes due in November 2017.
  
  "The notes were offered by MGM as part of a placement of US$1.5 billion in aggregate principal amount of the notes, as first announced by MGM on May 13, 2009, the proceeds of which will be used by MGM to part settle some of its outstanding debts and for general corporate purposes," RWB said in statement today.
  
  It added the notes were secured by a first-priority lien on substantially all of the assets of the Bellagio Hotel and Casino and the Mirage Hotel and Casino, both located in Las Vegas, and were general senior obligations of MGM, guaranteed by substantially all of its subsidiaries and equal in right of payment with all existing or future indebtedness of MGM and each guarantor.
  
  RWB said the subscription represented a good opportunity to expand its investment portfolio and enhance returns on its existing cash balances.
  
  It added that with yield returns in excess of 10%, the investment would generate an attractive return compared to what was currently attainable in the money markets or in other secured investments regionally, especially within the RWB group's core leisure and hospitality industry, it added.
  
  "Further, the notes will be secured against high quality gaming and entertainment assets in Las Vegas, thereby giving downside risk protection to the investment," it said.
  
  MGM, which is listed on the New York Stock Exchange, is one of the world's leading casino entertainment providers, owning and operating 16 properties in the US.
  
  MGM also has 50% interests in four other properties in Nevada, New Jersey, Illinois and Macau. For the financial year ended Dec 31, 2008, MGM group recorded net revenues of about US$7.2 billion.

Just blogged on Tuesday on the massive global stock sale or also known as secondary offerings, Worldwide Blockbuster Stock Sale. And for MGM see MGM Mirage Shares Fall After Stock Sale Is Completed

The yield is no doubt attractive.

However, the downside risk protection mentioned is rather questionable.

Listed companies do not issue secondary offerings without reasoning. They do so because they need fresh capital. And most of the time (not all), the fresh capital is required as part of a company restructuring exercise. And you know what restructure ultimately means. It's a nice word used to describe the correction of past mistakes. This is my flawed view.

So what about MGM Mirage.

No doubt the name is glamorous and its name has the worldwide branding. Talk about gambling and Las Vegas, MGM Mirage is one of the name.

Now MGM had been mentioned on this blog before. On Wednesday, March 04, 2009 MGM Mirage, Yet Another Casino Operator In Huge Trouble

Let me highlight the posting here again.

• LAS VEGAS (AP) — MGM Mirage Inc., the gambling company owned by billionaire investor Kirk Kerkorian, said Tuesday that it may default on its debt amid development of its biggest casino project ever, the $8.6 billion CityCenter in Las Vegas.
  
  Unless the economy turns around and more people start gambling again, the Las Vegas-based casino company believes it will break its loan agreements this year, it said in a filing with the Securities and Exchange Commission.
  
  That would mean a default on its senior credit facility, which MGM has asked to modify.
  
  MGM Mirage will delay filing its annual report until March 17 because it is still assessing its financial position and liquidity needs, the company said in Tuesday's unscheduled filing. One factor in the delay, the company reported, was its decision last week to tap $842 million of its $4.5 billion senior revolving credit agreement to cover general expenses.
  
  As of the end of September 2008, MGM Mirage had $13.29 billion in long-term debt.
  
  Many U.S. casino companies borrowed huge sums in the last few years to develop resorts in the United States and abroad. But several are having trouble making payments on that debt because their revenue has fallen sharply over the past year as fewer patrons spend less money on gambling and services.
  
  Chief Executive Jim Murren, who took over late last year, has said the company is exploring a half-dozen deals around the world in which MGM Mirage would lend its name and expertise to generate income.
  
  It sold the Treasure Island casino on the Las Vegas Strip to Kansas billionaire Phil Ruffin for $775 million and has since been shopping other properties, including nearly 300 acres of land in Nevada and Atlantic City, N.J., and two airplanes.
  
  MGM Mirage has not reported on its financial position since September nor posted its earnings for the quarter that ended Dec. 31.
  
  The March 17 report is to include an auditor's assessment of whether MGM Mirage can continue as a company.
  
  Another casino operator, Las Vegas Sands Corp., faced similar questions from its auditor in November, but the concerns were removed after the company raised $2.1 billion in capital by selling common stock and preferred stock with warrants. In September, Sands' billionaire founder and CEO Sheldon Adelson and his wife invested $475 million in the company to help meet its debt obligations.
  
  MGM Mirage has said it still needs to raise $1.2 billion to finish CityCenter on the Las Vegas Strip. The 67-acre complex of hotels, a casino, condos and retail space has been called the largest privately financed project in U.S. history. CityCenter is a joint venture of MGM Mirage and Dubai World subsidiary Infinity World Development Corp. Dubai World also owns a 9.4 percent stake in MGM Mirage.
  
  Analyst Robin Farley of UBS Investment Research told investors on Tuesday that MGM Mirage and Dubai World each need to fund about $1.3 billion for CityCenter this year.
  
  "MGM had expected to fund their portion with condo sales proceeds; however, we expect many of the condo sales may not close," Farley said.
  
  MGM Mirage's profit during the first three quarters of 2008 fell 59 percent compared with the same period in 2007, from $712.21 million to $292.7 million.
  
  Joseph Weinert, senior vice president of casino consulting business Spectrum Gaming Group in Linwood, N.J., said MGM Mirage's filing on Tuesday is a sign of the times.
  
  "When you have one of the industry giants walking a financial tightrope, it really speaks to the state of the whole industry," Weinert said. "MGM is a widely respected company both on Wall street and in the gaming street, and to see a company like that in the situation it's in, it's a troubling sign for Las Vegas."
  
  Shares of MGM Mirage dropped 37 cents, or 14 percent, to $2.25 in after-hours electronic trading. It ended the regular session at $2.62, down 43 cents or 14 percent from its previous close. The stock has lost most of its value since peaking at $64.73 last March.
  
  In the last year, the 91-year-old Kerkorian's majority stake in the company shrank in value from $9.6 billion to about $390 million.
  
  Kerkorian's Tracinda Corp., based in Beverly Hills, Calif., also holds stakes in Ford Motor Co. and Delta Petroleum Corp.
  
  Tracinda sold part of its stake in Ford in October, taking millions of dollars in losses. Kerkorian, a longtime casino and hotel developer, has a mixed track record with the other two major U.S. automakers, including an unsuccessful $4.5 billion cash offer for Chrysler last year and his push for General Motors Corp. to form an alliance with Nissan Motor Co. and Renault SA in 2006.
  
  Tracinda also was Chrysler's largest shareholder at the time of its 1998 combination with Daimler-Benz.

see also Betting On The Casino Industry?

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As stated, the casino industry in the US simply over borrowed and they used the funds to build godzilla sized casino projects (Hello Sentosa!) but with revenue plunging due to fewer patrons spending less money, the risk is that the projects could turn into massive white elephants. And when these massive white elephants are funded by massive borrowings, would one boldly dare say that the downside risk is protected just because of the MGM Mirage brand name?

Would you?

Yeah the yield is fantastic but given the current economics woes, isn't this why the yield is so fantastic?

Oh for sure, no risk no gain.

But risking too much is not too bright either.

How now my dearest Brown Cow?