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.
