MGM touts December refi transactions; de-leveraging is focus, not M&A

By Paul Deckelman

New York, Feb. 20 - MGM Resorts International closed out what its chairman and chief executive officer called "a very productive year with a solid fourth-quarter result," including a series of re-financing transactions in December that he said had "transformed our balance sheet in the quarter."

James J. Murren said that those transactions, which included a junk bond deal, redemptions via tender offers of several issues of existing higher-coupon debt and a new credit facility, " resulted in significant interest savings, and that will obviously translate into incremental free cash flow and further help the company de-leverage itself, which is our overarching goal."

Deals reshape finances

During the conference call on Wednesday following the Las Vegas-based gaming giant's release of its results for the fiscal 2012 fourth quarter and full year ended Dec. 31, chief financial officer Daniel J. D'Arrigo told analysts that those transactions will save the company about $230 million a year in annual interest expense.

"Consistent with our strategy, these transactions will allow us to maximize our free cash flow and further enhance the company's de-leveraging efforts," he said.

MGM, an operator of casinos in Las Vegas and other U.S. regional gaming jurisdictions, such as Atlantic City, Detroit and Mississippi, and in the Chinese gaming enclave of Macau, did an upsized $1.25 billion issue of non-callable 8.5-year senior notes in a quick-to-market deal, pricing those bonds at par on Dec. 6 to yield 6 5/8%.

Around that same time, it came to market with $4 billion of amended and restated senior secured credit facilities, including a $1.75 billion term loan B, upsized from an originally planned $1.5 billion, that bears interest at Libor plus 325 basis points atop a 1% Libor floor. It priced at 99.5 and featured 101 soft call protection.

The facilities also included a $1.2 billion revolving credit line, downsized from $1.25 billion originally, and a $1.05 billion term loan A tranche, also downsized from $1.25 billion. Both of those came at spreads of 300 bps, but will be subject to credit rating adjustments after six months, which would reduce those spreads to 275 bps based on current credit ratings.

Proceeds from the new credit facilities and the bond deal, along with $1 billion of cash on hand, were used to repay the then-existing credit facility borrowings and to fund tenders for its then-existing senior secured notes.

Holders tendered most of the $750 million of 13% notes due 2013, the $650 million of 10 3/8% notes due 2014, the $850 million of 11 1/8% notes due 2017 and the $845 million of 9% notes due 2020, and the company called the remainder for redemption after the tender offer closed.

China unit generates cash

As of the end of the fourth quarter, the company and its various subsidiaries showed consolidated balance-sheet debt of about $13.6 billion, up from $13.5 billion a year earlier. Consolidated cash and equivalents stood at $1.5 billion, versus $1.8 billion a year earlier.

Interest expense in the fourth quarter was some $280 million, including about $8 million from its MGM China joint venture and $17 million in amortization. D'Arrigo estimated that gross interest expense in the first quarter, thanks to the take-out of the higher-interest debt in December, would be around $225 million, including $8 million from MGM China and about $8 million in amortization expense.

The CFO said that excluding MGM China, MGM Resorts currently has about $1.2 billion of available capacity under its revolver and some $220 million in excess cash on the balance sheet, totaling just over $1.4 billion of available liquidity.

"We will continue to evaluate opportunities to de-risk the company and improve our overall cost of capital," he said.

MGM China, a 51%-owned joint venture with Chinese gaming mogul Pansy Ho, which operates the company's lucrative existing Macau casino and is in the process of developing a second resort in the enclave's Cotai area, ended the fourth quarter with cash of some $952 million, debt of about $554 million and an adjusted leverage ratio of less than 1 time, based on their trailing 12-month EBITDA, the CFO said.

He called that "a pretty strong balance sheet," adding that strength had "clearly led" to the joint venture's board to announce on Wednesday that it would pay a $500 million special dividend to its two owners, with MGM to get $255 million of that cash.

CityCenter starts to improve

D'Arrigo said the company's other major joint venture - the ambitious CityCenter residential, hotel and retail project near the company's casinos on the Las Vegas Strip, jointly owned with Dubai World - "is on a solid financial foundation," with roughly $1.85 billion of outstanding debt, excess cash of $210 million and another $140 million in cash related to the late-December sale of some of its condo units."

During the question-and answer portion of the conference call following the formal presentations by Murren, D'Arrigo, CityCenter project chief Robert H. Baldwin and Grant R. Bowie, the president of the China operation, there was some extended discussion of CityCenter's finances, which have had some rough spots in the past. Murren declared: "We're not in negotiations today to sell it."

He said, "Both [partners] believe that City Center's higher cash flow days are upon us, and it would be best to see this property and this whole complex reach its potential, which we believe can do over the next couple of years."

Baldwin said that with a debt load of $1.85 billion, carrying an interest rate "a little less than 9%, we're obviously looking to refinance at some point in time at a much lower rate, given the condition of our balance sheet and improving earnings at City Center."

D'Arrigo added, "As far as the cash that's building up, we do intend on continuing to reduce leverage, whether it be through debt reduction or, as Bobby mentioned earlier, continuing to improve the cash flows. The partners are not pleased where the overall leverage is on the campus right now, and that will be the focus with the excess cash and the improving cash flows going forward - [it] will be to reduce debt and continue to improve leverage there."

He said, "At some point in time in the future, you can rest assured that both partners have a lot invested in this -- and we will be looking to pull money out of that venture in the future."

Deleveraging yes, M&A no

An analyst asked whether MGM might be looking to make strategic acquisitions, especially in regional gaming markets, now that it has completed its re-financing transactions.

Murren said, "We have no interest in acquiring assets, regionally or otherwise. We have an interest in investing in markets where we feel like we can generate a great return, and we have a great interest in deleveraging the company and investing here in Las Vegas where we have so many competitive advantages."

While he thinks there will be some merger and acquisition activity in the industry, "I don't think we'll participate on the acquisition front there."

Murren refused to completely rule out any M&A; he said that the company might use its cash "to look at a few markets around the world."

But, he reiterated, it would "really, predominantly deleverage the company to invest in our existing assets [and] recover cash flows that we lost in '06 and '07. I think that's the best way for our shareholders."

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