Uncertainty in China. That was the great imponderable affecting Fitch Ratings’ assessment of MGM Resorts International, which it evaluated as “Ratings Watch Negative.”
While acknowledging improved clarity with regard to MGM’s balance sheet and financial policy, Fitch’s outlook was clouded by “limited visibility” into the review of casino concessions in Macau, due next year.
MGM owns two casinos in the Asian enclave, where more stringent regulatory policies could “impact cash flows and leverage” (in part by curbing dividend payments to U.S. parent entities), as well as prevent operators’ ability to obtain new concessions. Fitch did not specifically allude to Macau’s new ban on the extension of gaming credit (“rolling chips” in industry parlance), but this might have been a factor in its cautious forecast.
Fitch’s grade on MGM “reflects the potential for negative rating actions should there be signs that the recovery in visitation to Macau, particularly from Mainland China, and resultant gaming revenues are not materializing.” The ratings service projects that revenue levels in Macau will not reach 2019 levels for another two years, hitting 90 percent of the previous benchmark in 2023.
As for the concession re-bid, Fitch’s prediction is that the “procedure will take a pragmatic form and MGM China will continue operating in Macau in the long term.” Even in a worst-case scenario, MGM China accounts for only 20 percent of the parent company’s total cash flow, unlike rivals Wynn Resorts and Las Vegas Sands, which are more heavily exposed in China.
Fitch said resolution of the negative watch would rely on a greater degree of recovery in Macau and on regulatory decisions that will fall outside its six-month prognostication. But it mooted that the government might punt concession reviews well into the future, exercising an obscure clause whereby the present arrangement can be extended by five years.
“Fitch views the possibility of incumbent concession holders failing to secure a new concession as low, though the risk should not be ignored. The operators have invested several billions of USD capital, are large local employers and critical government taxpayers, and have supported the local and Mainland government’s broader policy goals,” the report read.
However, complications emanate from Beijing, particularly its zero-tolerance policy toward COVID, which has squeezed access to Macau. “Reducing quarantine requirements between China and Hong Kong would be positive developments, though disruptions from local COVID-19 cases would still be likely.”
MGM’s saving grace, in Fitch’s view, is its U.S. operations and healthy liquidity, which would aid it in paying down debt. It described the company’s domestic gambling operations as “essentially fully recovered,” especially in regional markets.
“The strong performance in Las Vegas, both slots and table games, is offsetting lingering weakness from the international and convention segments, although the latter will come back more in earnest in 2022.”
Fitch profiled MGM’s regional properties to outdo 2019 business both this year and next, while total recovery in Las Vegas (whose visitor numbers are still sub-2019) will happen in 2023, “which may prove conservative, given current trends domestically.”
The company does face some domestic constraints, having monetized all its real estate in sales to REITs and facing substantial new rent commitments, in addition to the cost of having bought the operations of The Cosmopolitan of Las Vegas. “MGM guarantees the two mortgages for the Bellagio and MGM Grand/Mandalay Bay joint ventures … respectively, which is another negative liquidity consideration,” added Fitch.
On the plus side, MGM is looking at a $4 billion payday from the sale of MGM Grown Properties to VICI Properties, money that Fitch believes will be split between dividends, expanding BetMGM, and financing a $9 billion megaresort in Osaka, Japan. The company is also committed to $600 million worth of reinvestment in its properties this year, particularly in Macau.
MGM stock traded essentially flat on the Fitch report, hovering around $41.80 per share.
