MGM Mirage's High-Stakes Gamble

MGM Mirage (MGM), the Las Vegas Strip's largest casino owner, is counting on the Dec. 1 unveiling of the $8.5 billion CityCenter resort to mark the end of the city's losing streak and the debt crisis that almost sank the company. CityCenter, 67 acres of hotels, condominiums, gambling, and shopping linked by monorail, opens as Las Vegas' two-year recession eases. The cost, along with the global credit crunch, drove MGM Mirage stock to less than 2 in March and forced a share sale that loosened founder Kirk Kerkorian's control. The project's co-owner, state-owned Dubai World, added a new twist last week when it sought to delay payment on its own debts. The partners have planned to increase CityCenter's borrowings to retrieve cash as early as mid-2010, according to MGM Chairman and Chief Executive Jim Murren. The casino company would use its share to help reduce $13 billion in long-term debt. CityCenter is inoculated against any default by its owners, and future borrowings would be based on the project's credit rating and projected cash flow, Murren said. "We already have all our money" to open, Murren, 48, said in a Nov. 27 interview. "All the cross-defaults were eliminated. If we have a default at either parent it could not trigger a default at the joint venture." Murren wants to pare long-term debt to $10 billion within five years and raise MGM Mirage's credit rating to an investment grade from today's CCC+ junk level by Standard & Poor's. The Las Vegas-based company also plans to sell stock in its Macao, China, venture next year and has assets that may serve as collateral for additional refinancing. Cash WithdrawalWith $1.8 billion in debt, CityCenter may support more loans once it opens. Annual cash flow of $400 million to $500 million would let MGM Mirage and Dubai World withdraw about $600 million each, said Dennis Farrell, a casino debt analyst at Wells Fargo Securities in Charlotte. "Down the road if they want to try and take it public, or try and recapitalize the entity, it could send cash out to both parties," Farrell said. Dubai World, an investment company for the Persian Gulf emirate, is trying to delay payments on $59 billion of liabilities. Should it seek to sell its interest in CityCenter, MGM Mirage has first right of refusal to buy out its partner, corporate filings show. Each partner's stake is worth almost $2.45 billion, based on MGM Mirage's third-quarter assessment as it wrote down its CityCenter investment by $1.16 billion. Dubai World also owns MGM Mirage stock valued at about $275 million. MGM OptionsMGM Mirage could seek bank loans, equity financing, or tap credit markets should Dubai World seek to be bought out, according to a person familiar with the company's options. Other possibilities include an investor replacing Dubai World in the joint venture, or an investor buying the stake and trading it for MGM Mirage stock, said the person, who sought anonymity because discussions are private. Dubai World spokespeople didn't immediately respond to e-mails sent outside of local business hours. The global credit crisis and recession almost cut off CityCenter construction funding. In May, MGM Mirage issued $2.1 billion in stock and secured bonds, paying off some debt and restructuring other loans. Kerkorian's stake fell to 37% from 54%. MGM Mirage took steps to protect CityCenter in April, Murren said. The partners, resolving a legal conflict, eliminated all cross-default provisions, he said. Las Vegas "Neighborhood"Murren, a former Wall Street analyst, says CityCenter's "neighborhood" of unique architecture, art, and dining will be a must-see for tourists and locals, giving MGM Mirage a greater share of visitors' spending. "We will get our rightful majority share of that incremental revenue," Murren said to reporters in Las Vegas on Nov. 18. "We've developed the thing that everyone has to see." Travel to the city will rise 7% to at least 38 million visitors in 2010, Murren said. CityCenter's almost 6,000 rooms may steal guests from the company's nine other Strip resorts, hold down room rates, and hurt Las Vegas Sands (LVS), Wynn Resorts (WYNN), and Harrah's Entertainment, some analysts say. "The threshold for success now is simply that MGM doesn't cannibalize itself after this year's survival roller-coaster," said Bill Lerner, a Las Vegas-based analyst at Union Gaming Group. "We're starting to now see visitation stabilize and grow again in Las Vegas, so it could be a decent year." Condo Price CutsWork on CityCenter, between the company's Bellagio and Monte Carlo casinos, started five years ago. An official grand opening is scheduled Dec. 16. The company shows off CityCenter in media events starting Tuesday with Vdara, a 1,500-suite condo-hotel, according to a company statement. On Dec. 3, MGM Mirage opens Crystals, with 500,000 square feet of retail space including Tiffany & Co. (TIF), Louis Vuitton, and Bulgari. On Dec. 4, the company showcases the Mandarin Oriental Hotel, with 619 guest rooms and residences on 47 floors. The Aria Resort & Casino opens Dec. 16, adding 4,004 rooms. "If he can target only my visitors and not his own, I tell you he's got a magic wand," Las Vegas Sands Chairman and CEO Sheldon Adelson said Monday in an interview in Hong Kong. "I'm going to ask him where he bought it so I can buy one myself." MGM Mirage cut contracted prices on condominiums in CityCenter's Veer towers and other apartments by 30% after the financial crisis and plunging real estate values made it unlikely existing buyers would close sales. The Harmon Hotel, with an additional 400 rooms, is scheduled to open in late 2010, according to the Web site. The December openings will add 27% more high-priced rooms to the 20,000-plus available now, Farrell said. Citywide, Las Vegas already has more than 140,000 rooms and will add almost 4,000 in 2010, according to the Las Vegas Convention & Visitors Authority. Travel to VegasWells Fargo's Farrell recommends bond investors purchase MGM Mirage secured notes and ones that mature by the end of next year. He rates the company's unsecured debt maturing in 2011 and later "underperform," partly because CityCenter may cannibalize its older properties. MGM Mirage fell 11¢, or 1%, to 10.45 at 10:07 a.m. in New York Stock Exchange composite trading. The shares sank as low as 1.81 in March. Kerkorian, 92, said last month he's seeking a partner for his stake or other deals, calling the shares undervalued. Las Vegas' two-year plunge in travel and gambling is abating. In September, visits rose 4.3%, the first increase in 18 months. Strip gambling slid 3.6%, the smallest drop since June 2008. MothballsSix projects are halted on the north end of the Strip. Boyd Gaming (BYD) mothballed the Echelon Resort, and Fontainebleau is broke and unfinished. Four others, including one by MGM Mirage and Kerzner International, owner of the Atlantis casino in the Bahamas, remain empty lots. Projects around CityCenter are being finished. Next door, Deutsche Bank's (DB) Cosmopolitan Resort & Casino is set to open in September, and Planet Hollywood Resort is preparing to open the first of two PH Towers. Nearby, Hard Rock Hotel opened the Paradise Tower in July and its all-suite HRH opens Dec. 28. "We were not set up for the economic tsunami we experienced and the financial meltdown. That one-two punch brought us to our knees," said Murren. "It's now my responsibility to make sure this company's never in a position to be as vulnerable."

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