CreditSights says it sees “limited impact” on the debt profile of Macau casino operator MGM China Holdings Ltd from the potential takeover of its United States-based parent, MGM Resorts International, by conglomerate People Inc, as announced on Monday in a deal valued by the suitor at US$18 billion.
MGM China runs the MGM Macau and MGM Cotai casino resorts in the Macau market.
“Any incremental debt” stemming from the deal, “is likely at the MGM Resorts level”, while MGM China’s bonds – “unlike the U.S. dollar bonds of MGM Resorts” – are covered” by a “change of control provision,” involving a “US$101 put”, CreditSights noted in a Tuesday memo .
A “put” is a reference to a strike price – designed to insure an investor’s interests – at which they can dispose of a relevant asset.
MGM China’s three-strong series of U.S. dollar bonds in an aggregate principal amount of US$2 billion are currently rated by CreditSights as “B1/B+/BB-” respectively, all with a “stable” outlook. They mature respectively in February 2027, June 2031, and May 2033.
“We keep our ‘outperform’ recommendation on MGM China,” wrote CreditSights analysts Nicholas Chen and David Bussey.
“We see some price upside for bondholders of the MGM China 2027 and 2033” bonds, “given that their bond prices (US$99.75 and US$100.09, respectively) are currently below the US$101 put level,” they noted.
“However, we note the MGM China 2031 is currently trading above (around US$104.15, at the time of writing),” the analysts added.
CreditSights also said there was a change of control provision for the MGM China revolving credit facility – which it said had US$663.3-million outstanding on a “total facility size of circa US$3 billion”.
Its reading of the provision was that if MGM Resorts ceased to be the legal and beneficial owner of over 50 percent of the shares in MGM China, directly or indirectly, it would mean the outstanding loan amount on the revolver “will become immediately due and payable, and… the facility itself will be cancelled immediately”.
CreditSights said MGM China had circa US$918-million of unrestricted cash and circa US$2.7-billion of total debt, comprising US$2 billion outstanding on its U.S. dollar bonds and US$663-million outstanding on the revolver.
MGM liquidity limited
“Given the insufficient liquidity at the MGM China level to service the full debt stack, we opine that People Inc would need to enact a refinancing plan (debt or otherwise) to address MGM China’s debt,” wrote the CreditSights analysts.
People Inc, currently a 26.1-percent investor in MGM Resorts, has offered to acquire all of the outstanding shares of MGM Resorts that it does not already own, for US$48.30 per share in cash.
The suitor said it would fund the move via “a combination of existing cash on hand… and additional debt and equity funding commitments”.
CreditSights observed: “MGM Resorts did not disclose further details regarding the potential takeover, such as how much of the acquisition will be debt-funded by People Inc – which could incur incremental debt to MGM Resorts – and what the possible timeline was, if any.”
The institution added: “A largely debt-funded acquisition would likely stretch MGM Resorts’ credit metrics with potential rating downgrade pressure leading to a change of control triggering event.
“However, the lack of transaction details renders it difficult to determine the likelihood of a rating downgrade at this juncture.”
The proposed take-private acquisition of MGM Resorts by People Inc, its largest-single shareholder, could have significant implications for MGM China Holdings Ltd and the parent’s share of a JPY1.51-trillion (US$9.49-billion currently) investment in MGM Osaka in Japan with local partner Orix Corp. That is according to several investment analysts in Tuesday notes.
