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Can MGM Resorts Survive?

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Las Vegas gaming revenue is falling, visitors are looking for deals, and casinos are struggling to return to profitability after the recession. To make matters worse, the two newest casinos on The Strip are The Cosmopolitan, which is now owned by a bank, and CityCenter, one of the worst investments in the history of gaming.

Las Vegas has become an afterthought for investors in Las Vegas Sands (NYSE: LVS  ) and Wynn Resorts (Nasdaq: WYNN  ) , which generate most of their income in Asia. Competitor Melco Crown (Nasdaq: MPEL  ) doesn't even have to worry about the struggling U.S. market. But MGM Resorts (NYSE: MGM  ) still relies on Las Vegas for most of its revenue.

So it's time we ask the same question I asked a few months ago. Can MGM Resorts make it through the Vegas malaise and survive? Yesterday, MGM announced a step in that direction by saying it would not be selling part of its stake in MGM Macau and would actually be taking a 51% controlling interest. I've criticized IPO plans in the past as selling MGM's best asset, and the market apparently agreed it was a bad idea, because the stock was up nearly 9% yesterday.

It's all about debt
When you look at MGM, the biggest question that needs to be answered is whether the company will be able to pay off its debt obligations.

In 2010, MGM had $504.0 million in cash flow from operations before paying for any capital improvements, a must for ongoing operations. Ongoing capital expenditures should be around $200 million based on what was spent last year. So that leaves around $300 million to pay off debt, and with only $499 million on the balance sheet, there isn't a lot of room for error.

2011 maturities $455 million
2012 maturities $546 million
2013 maturities $1,384 million
2014 maturities $3,463 million
2015 and beyond maturities $6,427 million

MGM has done a nice job pushing maturities past 2012, but it looks like the company may need to tap into the $1.2 billion available under its senior credit facility just to pay off 2011 maturities. And then there's the issue that worries me most.

Those pesky covenants
More immediately, MGM has to meet loan covenants on its senior credit facility. For the first quarter, the company would have to have $1.1 billion of EBITDA in the trailing 12 months. Considering it had $1.14 billion of EBITDA to end 2010, that might be a close call. Las Vegas isn't exactly healthy, with gaming revenue down 9.6% in February.

Remember it wasn't a lack of cash or growth that nearly sent Las Vegas Sands into bankruptcy a few years ago. It was the possible violation of loan covenants. This debt issue hasn't gotten a lot of publicity lately, but it's something to watch in MGM's next quarterly filing. For now, I'll say MGM can survive, but depending on what happens with these loan covenants that could change very quickly.

Fool contributor Travis Hoium owns shares of Melco Crown. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.

Melco Crown Entertainment is a Motley Fool Global Gains recommendation. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (3) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 14, 2011, at 6:34 PM, Senescent wrote:

    Doesn't look good for MGM Travis - any bump in the road crashes it. Kerkorian steps down as of June - just a little too late to make any difference IMHO.

  • Report this Comment On April 14, 2011, at 8:06 PM, BritishDave wrote:

    Agree with your view on MGM - but don't worry about Vegas revenues. This February was first time in years that NASCAR wasn't in February but March. That week brings hundreds of thousands of visitors and probably represents 20% of normal monthly revenues so actually they gained!

  • Report this Comment On April 15, 2011, at 8:00 PM, ikkyu2 wrote:

    Just you watch, Bernanke will keep his foot on the pedal too long, and a lot of funny money will slosh over into MGM's coffers.

    The creditors don't want to put MGM into receivership - that was available to them in 2009, they blinked. They understand that if Aria and CityCenter don't go cashflow positive in 2011 as predicted, then it will happen in 2012 or 2013. Meanwhile they're getting their interest payments and will continue to do so. And Macau will be a hit out of the park now that Pansy is playing ball!

    I'm so bullish on this stock that it's my third largest position.

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