Limited Upside for Bonds Despite MGM Credit Picture Sound

August 7, 2023, 12:18h – MGM Resorts International’s Corporate Bonds Provide Betting Opportunity

Last updated on: August 7, 2023, 12:18h.

MGM Resorts International’s corporate bonds may be considered high-risk with their junk ratings, but the company has demonstrated its ability to handle the debt.

MGM credit
MGM Grand on the Las Vegas Strip. A research firm says MGM’s credit profile is solid. (Image: MGM Resorts)

Recent reports show that MGM Resorts International had a successful second quarter, with BetMGM turning a profit. The company ended the quarter with $3.84 billion in cash and cash equivalents. While the company is focused on repurchasing shares, analysts predict this will not hinder their ability to service their debt.

Gimme Credit analyst Kim Noland stated, “MGM’s stock repurchases (over $600 million in the second quarter) suggest aggressive equity enhancement policies and weigh against credit quality improvement. We are maintaining our projections for full year 2023 including year-end consolidated rent-adjusted leverage in the low 5x range.”

MGM is currently rated “B1” by Moody’s Investors Service and “B+” by Standard & Poor’s (S&P), both of which are below investment-grade levels.

MGM Compensates Bond Investors for Risk

Given the non-investment-grade ratings, MGM provides higher yields to bond investors purchasing their debt to compensate for the added risk compared to investment-grade securities.

As an example, $750 million worth of MGM debt due in May 2027 currently yields around 6%. This yield is approximately 200 basis points below the 30-day SEC yield on the Markit iBoxx USD Liquid High Yield Index, but almost 200 basis points higher than the yield on 10-year US Treasuries.

Noland added, “We had rated the bonds due in 2027 outperform, and the price of those bonds has remained relatively stable with the yield hovering in the 6% area.”

Despite the stable price, Gimme Credit still maintains its “outperform” rating on MGM’s corporate debt maturing in May 2027, but notes that these bonds offer little upside potential. S&P recently upgraded MGM’s credit grade outlook to “stable” from “negative.”

Some Hope for MGM Credit Rating

While it may take time for MGM to regain investment-grade status, there are positive signs for the gaming industry’s credit profiles. Las Vegas Sands, for example, was recently upgraded to investment-grade territory by S&P.

Regarding MGM, analysts predict that the company will be able to maintain its leverage levels through the end of the year, potentially avoiding a downgrade to their B+-rated bonds. The company’s partnership with Marriott International may also contribute to improving its credit picture.

Noland concluded, “Based on data from the Cosmopolitan in Las Vegas, an MGM property, we estimate that MGM should be able to replace approximately 5-7% of its lowest yielding rooms with Marriott direct bookings. This could increase profit per room by nearly $100 per night, adding up to $60-75 million in annual profit once fully implemented.”

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