MGM Bonds Steady Income-Generating Ideas

Posted on: August 7, 2023, 12:18h. 

Last updated on: August 7, 2023, 01:20h.

Corporate bonds issued by MGM Resorts International (NYSE: MGM) carry junk ratings, but the casino giant has the ability to service that debt.

MGM credit
MGM Grand on the Las Vegas Strip. A research firm says MGM’s credit profile is solid. (Image: MGM Resorts)

The Bellagio operator recently reported impressive second-quarter results and noted that BetMGM was profitable in that period with the potential to remain that way over the remainder of 2023. The largest operator on the Las Vegas Strip concluded the June quarter with $3.84 billion in cash and cash equivalents, but at least one analyst notes the gaming company is likely to maintain its focus on repurchasing shares, though that’s not necessarily a danger to debt servicing.

MGM’s stock repurchases (over $600 million in the second quarter) suggest aggressive equity enhancement policies and weigh against credit quality improvement,” observed Gimme Credit analyst Kim Noland in a note out Monday. “We are maintaining our projections for full year 2023 including year end consolidated rent-adjusted leverage in the low 5x range.”

Moody’s Investors Service rates MGM “B1” while Standard & Poor’s (S&P) grades debt issued by the gaming company “B+”. Both ratings are well into junk territory.

MGM Compensates Bond Investors for Risk

Those credit ratings aren’t alarmingly bad, but they aren’t investment-grade either, meaning MGM has to compensate bond investors for the added risk they take when buying the casino operator’s commercial paper.

To that end, $750 million worth of MGM debt coming due in May 2027 yields around 6%. That’s about 200 basis points below the 30-day SEC yield on the widely followed Markit iBoxx USD Liquid High Yield Index, but almost 200 basis points in excess of the yield available on 10-year US Treasuries.

“We had rated the bonds due in 2027 outperform, and the price of those bonds has remained relatively stable with the yield hovering in the 6% area,” added Noland.

Gimme Credit maintained an “outperform” rating on MGM’s corporate debt maturing in May 2027 but noted those bonds offer “little upside” potential. In May, S&P lifted its outlook on MGM’s credit grade to “stable” from “negative.”

Some Hope for MGM Credit Rating

MGM must climb several notches to regain investment-grade status, and that’s likely a longer-ranging objective, but there are signs ratings agencies are warming to gaming industry credit profiles. For example, Las Vegas Sands (NYSE: LVS) was restored to investment-grade territory last month by S&P.

Specific to MGM, the Cosmopolitan operator is likely to be able to hold leverage in the high 6x range through the end of this year and that’s well below the area at which ratings agencies are likely to downgrade B+-rated bonds. A recently announced partnership with Marriott International could also benefit MGM’s domestic top and bottom lines, potentially aiding its quest to pare leverage and shore up its credit picture.

“Based on data from the Cosmopolitan in Las Vegas, a city where MGM sells 12 million room nights annually, MGM should be able to replace near 5-7% of its lowest yielding rooms with Marriott direct bookings. This could increase profit per room by near $100 per night and drive $60-75 million in annual profit once ramped,” concluded Noland.