MGM Scores a Last-Second Save

Bottom of the ninth, bases loaded, two outs, the count is full, MGM Mirage (NYSE: MGM  ) steps to the plate and -- homerun! Yesterday, MGM announced that it had reached a number of agreements that should allow it to complete its massive CityCenter project.

The primary news is that the lending consortium led by Bank of America (NYSE: BAC  ) agreed to release a $1.8 billion loan to MGM and its partner Dubai World to allow continued financing of the construction. The lending group also agreed to amend existing credit agreements to give the company some more financial flexibility -- at least for the near term.

In addition, Dubai World, which was more than a little ticked off about cost overruns at CityCenter and MGM's management of the project, had filed a lawsuit against MGM and refused to pay its part of the most recent interest payment. As part of the news yesterday, Dubai World dropped its lawsuit and hopped back on the same page as MGM, thanks to MGM's agreement to pay out-of-pocket for any future cost overruns, and a new structure that allows CityCenter to avoid doom if MGM files for bankruptcy.

This largess came at a cost to MGM, though. Not only will it now be on the hook for cost overruns, but it also faces a heftier interest rate on its debt. Worse yet, it was forced to put up some of its assets -- including vacant land on the Las Vegas Strip, Circus Circus Las Vegas, Gold Strike Tunica, and MGM Grand Detroit -- to secure the loans.

As I write this, MGM's stock is up nearly 40%, so there's no question about how investors feel about the company's new deal. But I'm not sure that what's good for this goose is good for the other geese in Vegas. Revenue on The Strip has been slumping, and the massive City Center project -- which will bring roughly 4,800 new hotel rooms, a huge new casino, and a giant shopping and entertainment center -- will provide major competition for the casinos owned by Wynn (Nasdaq: WYNN  ) and Las Vegas Sands (NYSE: LVS  ) .

Apart from the CityCenter project specifically, the news also suggests that lenders would rather work with debt-laden casinos than against them. But don't assume that this means everything is hunky-dory in casinoland. Consumers are still strapped, and most gaming companies are still weighted down with debt, so these companies aren't finished tightrope-walking quite yet.

Further Foolishness:

Fool contributor Matt Koppenheffer owns shares of Bank of America, but does not own shares of any of the other companies mentioned. The Fool's disclosure policy has never once been caught with its pants down. Of course, it doesn't actually wear pants...


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  • Report this Comment On May 01, 2009, at 12:01 PM, doclaphroaig wrote:

    I picked up some MGM stock about a week ago, when things looked gloomy. However, the prevailing theme these days is "too big to fail" and if ever there was a project that nobody wanted to see fail, it's City Center. If MGM couldn't sort it out, then the city, county or state would take over. Vegas can't afford a blight in the center of the strip, it would be the death of the place. MGM is still very dodgy as a company, but I think the stock looks OK for some decent appreciation in the very short term.

  • Report this Comment On May 01, 2009, at 2:34 PM, jettson12 wrote:

    told you mgm would fly...glad you covered your short position and maybe now you can quit bashing the casino stocks every day.

  • Report this Comment On May 01, 2009, at 2:46 PM, TMFKopp wrote:

    @jettson12

    To be perfectly clear, The Motley Fool has a disclosure policy (http://www.fool.com/help/index.htm?display=about02). Fool writers cannot trade in any stock they mention in an article for 10 days before or after the article is published.

    Matt

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