A recent report released by a top credit rating agency is warning investors about potentially increased risks from contingent lease obligations following a sale-leaseback scheme.
Increased Credit Risk
The report issued by Moody’s Investor Service considers the sale of the real estates of Aria and Vdara casino resorts on the Las Vegas Strip by MGM Resorts International earlier in the month as credit negative for the company.
MGM Resorts announced it would sell the real estate of both properties to private equity company Blackstone for an all-cash deal valued at $3.89 billion and would lease back the properties for $215 million, receiving a multiple of 18.1x the rent.
In addition, the Las Vegas-based casino operator bought the remaining 50% of interest in CityCenter from Infinity World Development for $2.12 billion to acquire full ownership of the property.
When considering the implications of the transactions, Moody’s said that, due to a considerable amount of lease obligations that could possibly exceed the company’s consolidated 2020 rent multiple equivalent of around 11x, MGM is facing increased leverage and financial risk and the deals are viewed as credit negative.
From late 2019, MGM Resorts is consistently liquidating its real estate holdings and increasing cash on its balance sheet. However, as these property sales include leasebacks, the financial obligations of the casino operator have been steadily increasing.
Credit Rating Remains Unchanged
Moody’s does not consider the recent real estate divestments as serious enough to impact the credit rating of MGM Resorts, which currently stands at “Ba3.” This indicates that there are speculative elements in the company’s bonds that are “subject to substantial credit risk.”
“Despite the expectation for significant new lease obligations for MGM associated with the transaction, Moody’s does not expect the transactions to have a meaningful impact on MGM’s consolidated leverage in 2022, where gross debt-to-earnings before interest, taxes, depreciation and amortization (EBITDA) leverage is expected near 7x.”
Moody’s Investment Service
MGM Resorts’ first quarter earnings report revealed one of the strongest balance sheets in the gaming industry, featuring $6.2 billion in cash and total liquidity of $9.7 billion, including access to a revolving credit facility.
In addition, if the gaming company needs more cash, it can continue to divest real estate properties to its real estate investment trust MGM Growth Properties, which recently saw 15th property added to its list, MGM Springfield.