The ratings agency said MGM’s stake in the project is unlikely to exceed 50%, and that the most likely breakdown is 40% apiece for the casino operator and partner Orix, with the remaining 20% controlled by local investors. That echoes sentiment from the gaming company that it won’t hold a majority in the Japan venue.
Based on the estimated US$10 billion development cost and MGM’s expectation that the project could be funded at 55% debt to equity, MGM’s equity contributions “could be US$2 billion-US$2.5 billion,” noted S&P. “MGM believes its equity contribution could be spread over several years, perhaps 2024-2026.”
The risk to the Bellagio operator is that it could take several years after the initial financial contribution for the Osaka integrated resort to deliver cash flow, meaning MGM likely won’t reap immediate profits. Conversely, as S&P pointed out, Osaka could pay long-term dividends for MGM, and bolsters the operator’s geographic footprint.
At a time when investors are demanding companies across all industries retain cash or deploy it in a prudent fashion, Japan could work in favor of MGM. For starters, the Osaka consortium hasn’t even been officially awarded a license – that could happen later this year. As such, MGM is unlikely to be spending big in Japan until late 2023 or next year.
“Based on the current timeline and the likelihood that Japan will not issue a license until 2023, we do not expect material spending to begin before late 2023 or 2024,” added S&P. “The project will likely take several years to complete. If the MGM-Orix consortium receives a license, MGM anticipates opening the resort in the second half of this decade.”
The research firm highlighted New York as the other jurisdiction in which MGM could be compelled to spend big over the near to medium term. It’s widely expected the slots-only Empire City in Yonkers will land one of three downstate casino licenses. Companies selected need to pledge at least US$500 million for the gaming project and the same amount for a licensing fee.
“MGM would need to make the US$500 million license payment this year, but most of the spending would occur in 2024 and 2025. MGM estimates its investment to expand its Empire City Casino could cost US$2 billion-US$2.2 billion, including the license fee,” according to S&P.
S&P rates MGM “B+,” which is a junk grade. The research firm widened the lease-adjusted downgrade threshold at the ‘B+’ rating to 7.5x from 6.5x.
“Furthermore, we expect the company will maintain healthy liquidity of at least $3 billion, including cash and revolver availability. The company believes this provides sufficient cushion to absorb volatility that its U.S. fixed lease obligations can introduce.”
At the end of the third quarter, MGM’s liquidity stood at US$6 billion, giving it one of the strongest balance sheets in the industry.
Source: Casino.org (By Todd Shriber)
