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Fitch: MGM's Rating Unaffected by National Harbor Sale to MGP
September 13, 2017 / 4:28 PM / 3 months ago

Fitch: MGM's Rating Unaffected by National Harbor Sale to MGP

(The following statement was released by the rating agency) NEW YORK, September 13 (Fitch) MGM Resort International's (MGM) 'BB' Issuer Default Rating (IDR) is not affected by the sale of the real estate assets of National Harbor Casino Resort (National Harbor) to MGM Growth Properties (MGP) for $1.2 billion, according to Fitch Ratings. We calculate MGM's pro forma gross consolidated leverage at 5.2x, which is still consistent with the 'BB' IDR and is only slightly above 5.1x on an LTM basis (LTM includes annualized National Harbor performance and repayment of MGM's 2018 notes). We still forecast MGM de-levering below 5.0x within the next 12 months. Fitch subtracts distributions to minority holders from EBITDA when calculating leverage. Our pro forma calculation includes $150 million of annualized EBITDAR for National Harbor and $95 million in rent paid to MGP. We view the transaction as having a slightly negative impact on MGM's leverage going forward as it will increase minority distributions from MGP, which Fitch subtracts from consolidated EBITDA. Annual rent to MGP will increase to $745 million from $650 million and MGM's ownership of MGP is set to decrease to 74% from 76%, increasing overall cash leakage from the MGM corporate structure as MGP (a REIT) pays dividends. In addition, the transaction reduces MGM's stake in National Harbor and moves the asset to an entity that has its own capital structure and is structurally senior to MGM's creditors. (National Harbor previously also had its own capital structural but could have easily been folded into MGM's primary credit group, which is no longer the case.) The transaction does not come as a surprise given MGP's right of first offer on the property and both companies' public comments regarding a potential sale. We view the inclusion of about $736 million of equity and $200 million of cash on hand in the funding mix positively as it keeps the leverage profile largely the same on a consolidated basis. On an absolute basis, debt declined slightly, as MGP used a $350 million unsecured note to refinance National Harbor's $425 million term loan. In addition to the National Harbor sale, MGM announced that it is repurchasing $327.5 million of shares from Tracinda Corporation. The repurchase will be funded with a revolver, which MGM will repay with the cash proceeds from the National Harbor sale. The repurchase is viewed by Fitch as neutral within a context of the 'BB' IDR, since pro forma consolidated gross leverage will remain unchanged. However, the repurchase announcement makes MGM's path and timing to investment grade more questionable in Fitch's opinion. In contemplating the transactions, MGM (which controls MGP) could have taken more stock consideration for National Harbor; thereby diluting its position in MGP less, or MGM could have used the cash consideration for more creditor-friendly initiatives such as debt paydown or development capex. RATING SENSITIVITIES MGM's Long-Term IDR could be upgraded to 'BB+' as MGM's leverage metrics, after adjusting for distributions to minority holders and from unconsolidated subsidiaries, approach 4.5x and 4.0x on a gross and net basis, respectively. Continuation of the stable or positive trends in Las Vegas and Macau, the renewal or extension of MGM China's gaming concession, and MGM's commitment to improving its balance sheet will be factors considered by Fitch when contemplating positive rating actions. Fitch may revise MGM's Rating Outlook to Negative or downgrade MGM's Long-Term IDR to 'BB-' if leverage sustains at above 6.0x for an extended period of time past 2017, due to potentially weaker than expected operating performance, debt-funding a new large-scale project or acquisition, or taking a more aggressive posture with respect to financial policy. For a leverage increase related to a debt-funded project, Fitch would assess MGM's liquidity and pro forma leverage as well as the project's diversification benefits and return on investment prospects. Fitch links MGM China's IDR to MGM's given MGM China's strategic importance to MGM. Therefore, Fitch may upgrade MGM China's IDR to 'BB+' if and when Fitch upgrades MGM's IDR to 'BB+'. FULL LIST OF RATING ACTIONS Fitch currently rates MGM as follows: MGM Resorts International --Long-Term IDR 'BB'; Outlook Stable; --Senior secured credit facility 'BBB-/RR1'; --Senior unsecured notes 'BB/RR3'. MGM China Holdings, Ltd (and MGM Grand Paradise, S.A. as co-borrower) --Long-Term IDR 'BB'; Outlook Stable; --Senior secured credit facility 'BBB-/RR1'. Contact: Primary Analyst Alex Bumazhny, CFA Senior Director +1-212-908-9179 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Secondary Analyst Colin Mansfield, CFA Director +1-212-908-0899 Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email: alyssa.castelli@fitchratings.com. Additional information is available on www.fitchratings.com ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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