MGM Resorts Upsizes Debt Sale To $850M

MGM Resorts International (NYSE: MGM) has announced an increase in its upcoming corporate bond sale, raising the offering size to $850 million from the initially planned $675 million.

The company, which is the largest casino operator on the Las Vegas Strip, will be issuing bonds with a total principal amount of 6.125% senior notes due in 2029. The transaction is set to close on September 17th, with part of the proceeds being used to pay off a debt that matures in 2025.

According to a statement, MGM plans to use the net proceeds from the bond offering to (i) repay existing debt, including its 5.750% senior notes due in 2025, and (ii) cover transaction-related fees and expenses, with the remaining funds being used for general corporate purposes. In the interim, the proceeds may be invested in short-term interest-bearing accounts, securities, or similar investments.

Despite having junk credit ratings like many of its peers, MGM has one of the strongest balance sheets in the industry, with $2.41 billion in cash and cash equivalents at the end of the second quarter.

MGM Bonds Not Considered Highly Risky

S&P Global Ratings has assigned a “BB-” rating to MGM’s latest bond sale, noting that in the event of a default, there would likely be a high recovery rate. While the ratings agency ran various default scenarios, it did not indicate that MGM is at risk of defaulting 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 reflects our expectation of substantial (70%-90%; rounded estimate: 80%) recovery for noteholders in the event of a default. This aligns with our issue-level and recovery rating on MGM’s existing unsecured debt,” the research firm stated.

Investors in corporate bonds typically focus on credit and default risks, which are particularly relevant when assessing junk-rated debt, such as MGM’s new bonds.

Issuers of non-investment-grade bonds like MGM must offer higher interest rates compared to higher-rated bonds to compensate investors for the increased risk. The current 30-day SEC yield on the widely monitored Markit iBoxx USD Liquid High Yield Index is 6.96%. Over 52% of the bonds in this index have a “BB” rating, the category in which S&P has placed MGM’s new debt offering.

Eliminating 2025 Bonds Is A Smart Move by MGM

Using the proceeds from this new bond issue to address some of its debt maturing in 2025 could be a wise strategy for MGM. Before the announcement of the bond sale, Deutsche Bank estimated that the gaming company had $1.175 billion in debt maturing next year at a blended interest rate of 5.5%.

The bank also estimated that MGM, which operates the Aria, paid $41.6 million in interest on variable-rate debt in the second quarter, a figure that could decrease by $8.7 million if interest rates drop by 150 basis points. The Federal Reserve is expected to cut rates this month, potentially by as much as 50 basis points.

Given MGM’s strong position on the Las Vegas Strip, its free cash flow potential, and its share buyback program, some analysts remain optimistic about the company’s corporate debt.