MGM Resorts International (NYSE: MGM) announced that it is increasing the size of a planned corporate bond sale to $850 million from the originally planned offering size of $675 million.
The largest operator of casino resorts on the Las Vegas Strip is selling bonds “in aggregate principal amount of 6.125% senior notes due 2029 at par.” That transaction is expected to close on Sept. 17. MGM will use some of the proceeds to pay an issue that comes due in 2025.
The Company intends to use the net proceeds from the offering of the notes to (i) repay indebtedness, including its outstanding 5.750% senior notes due 2025, and (ii) pay transaction-related fees and expenses, with the remainder for general corporate purposes,” according to a statement. “Pending such use, the Company may invest the net proceeds in short-term interest-bearing accounts, securities or similar investments.”
As is the case with many of its peers, Las Vegas-based MGM sports junk credit ratings, but in the case of the Bellagio operator, it has one of the strongest balance sheets in the industry. The company had $2.41 billion in cash and cash equivalents as of the end of the second quarter.
MGM Bonds Not Highly Risky
S&P Global Ratings rated MGM’s latest bond sale “BB-,” noting there would be a high recovery percentage in the event of a default. The ratings agency used a model to run various default scenarios, but did not say the gaming company is a candidate to default on its debt obligations.
“We assigned our ‘BB-‘ issue-level rating and ‘2’ recovery rating to the company’s proposed $675 million senior unsecured notes due 2029. The ‘2’ recovery rating indicates our expectation for substantial (70%-90%; rounded estimate: 80%) recovery for noteholders in the event of a default. This is in line with our issue-level and recovery rating on MGM’s existing unsecured debt,” observed the research firm.
Buyers of corporate bonds typically focus on credit and default risks and that’s amplified when evaluating junk-rated debt of which the new MGM bonds fit the bill.
As such issuers of non-investment-grade corporates must sell those bonds with higher interest rates than higher quality equivalents to compensate bondholders for the elevated risk. The current 30-day SEC yield on the widely followed Markit iBoxx USD Liquid High Yield Index is 6.96%. More than 52% of the bonds in that index carry one of the three “BB” grades — the spectrum in which S&P rates MGM’s newest debt sale.
Eliminating 2025 Bonds Smart Move by MGM
Using the newest issue to take care of some of its debt maturing in 2025 could prove to be a shrewd move by MGM. Prior to the news of the MGM bond sale, Deutsche Bank estimated the gaming company had $1.175 billion in debt at a blended interest rate of 5.5% maturing next year.
The bank estimated that in the second quarter, the Aria operator paid $41.6 million in interest expense related to variable rate debt — a figure that could decline by $8.7 million if interest rates decline by 150 basis points. The Federal Reserve is expected to trim rates this month, perhaps by as much as 50 basis points.
Highlighting MGM’s strong positioning on the Las Vegas Strip, free cash flow capabilities, and share repurchases, some analysts are bullish on the operator’s corporate debt.
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