MGM Bonds Serving as Continual Earners of Funds
MGM Resorts International, a popular casino operator traded on the New York Stock Exchange under the symbol MGM, has bonds with junk ratings. However, it has the ability to pay off this debt.
Recently, MGM reported excellent second-quarter results and acknowledged that its subsidiary, BetMGM, was profitable during that period. The company anticipates BetMGM will continue to be profitable until the end of 2023. With $3.84 billion in cash at the end of June, MGM appears to be more focused on buying back shares than paying off debt, but this doesn't threaten their ability to service their debt.
An analyst from Gimme Credit, Kim Noland, commented that MGM's large share buybacks suggest it's prioritizing equity enhancement over credit quality improvements. They expect MGM's total debt to be around 5x at the end of the year.
MGM's credit ratings are 'B1' from Moody's Investors Service and 'B+' from Standard & Poor's, both of which are well into junk territory.
Bond Investors Can Expect Higher Yields on MGM Bonds
MGM's credit ratings aren’t ideal, but they're not terrible either. This means bond investors need compensation for the higher risk they take when investing in MGM's commercial paper.
$750 million of MGM's debt due in May 2027 has a yield of about 6%. This is around 200 basis points lower than the 30-day SEC yield on the popular Markit iBoxx USD Liquid High Yield Index, but more than 200 basis points higher than the yield on 10-year US Treasuries.
Noland believes MGM debt due in 2027 remains outperform, but it offers limited upside potential. In May, S&P upgraded its outlook on MGM's credit grade from negative to stable.
Optimism for MGM Credit Rating Improvement
To return to investment-grade status, MGM must make significant improvements in its financial standing. However, it seems that ratings agencies may be more optimistic about the gaming industry's creditworthiness, as seen when Las Vegas Sands was given investment-grade status by S&P last month.
For MGM specifically, the company seems capable of maintaining a leverage ratio above 6x by the end of the year. This is lower than the threshold where ratings agencies would downgrade bonds with a B+ rating. Additionally, their recent partnership with Marriott International could boost both MGM's top and bottom line in the US, helping them lower their debt and improve their credit rating.
According to Noland, replacing 5-7% of MGM's lowest-yielding rooms with Marriott direct bookings could increase the company's profit per room by around $100 per night and generate annual profits of $60-75 million.
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Source: www.casino.org
