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MGM Resorts pops as it continues to reduce its debt load
12/07/2012 3:52 pm EST
One of those—the rebound in Las Vegas gaming and hotel revenue—has sputtered recently.
However, the other—refinancing of the company’s big debt load at lower rates and better terms—kicked in with a jolt this week.
Gaming revenue on the Las Vegas Strip, where MGM Resorts is the biggest operator, rose just 3.6% in October, Nevada’s Gaming Control Board reported on Friday, November 30. Following on MGM Resorts third quarter earnings report that showed a 2% drop in the period in REVPAR (revenue per available room) at the company's Las Vegas properties, it seems that the recovery in Las Vegas from a local recession and a huge oversupply of new rooms has hit a soft spot.
But on December 6 the company announced that it had sold $1.25 billion in 6.625% senior notes due in 2021. The company is looking to raise $4 billion to retire high-interest rate debt. MGM Resorts has $12 billion in debt outstanding, of which $4.9 billion matures before 2016. The average coupon interest rate on that debt is 8%.
Looking at the debt swap, Standard & Poor’s raised the company’s credit rating to B+. That’s an improvement but still leaves MGM Resorts credit rating four levels below investment grade.
On the news of the financing MGM Resorts shares climbed to $10.97 at the close on December 6 from $9.92 on December 4. The shares have dropped back slightly today but are still up 16.5% from the November 11 low.
I’d continue to hold these shares. (MGM Resorts is a member of my Jubak’s Picks portfolio http://jubakpicks.com/ ) The current low-interest rate environment gives MGM Resorts further room to lower its interest payments and debt load (while improving maturities) and most forecasts say that growth in room and gaming revenue in Las Vegas will pick up in 2013 from the second half of 2012. Revenue from MGM’s resort in Macau should pick up as China’s economy accelerates from the September growth low. And MGM continues to make progress toward opening a new casino on Macau’s Cotai strip.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did own shares of MGM Resorts International as of the end of September. For a full list of the stocks in the fund as of the end of September see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
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