Fitch upgrades MGM China despite pipeline funding concern

Fitch has upgraded the issuer default rating of MGM Resorts International and MGM China, citing the positive growth outlook for Macau and Las Vegas, strong free cash flow and declining interest expenses.
These factors, coupled with $3.6 billion in available liquidity and demonstrated access to capital markets, largely offset the agency’s concerns about the company’s near-term liquidity needs.
MGM Resorts IDRs were lifted to B+ from B, while MGM China went to BB from BB-.
The ratings outlook remains positive.
Fitch points out that MGM has one of the biggest development pipelines in the industry at about $5 billion, with $2.4 billion in maturities coming due through 2016. It estimates that
MGM will need to access additional $1 billion - $1.5 billion in capital to meet its funding needs through 2016.
Despite the ramp up in spending, the ratings agency expects overall leverage at the company to continue to decline. Consolidated leverage adjusted for minority interests will improve to 5x by the end of 2016, it says.
In Fitch's projections growth on the Las Vegas Strip offsets the recent softness in Macau until 2016, when MGM's projects start to come online. It sees the slowdown in Macau as being the result of the corruption crackdown on mainland China and expects the segment to stabilize by the end of this year or early next. Fitch sees 4 percent revenue growth for Macau in 2014.
Fitch says MGM’s $2.9 billion Cotai project is fully funded between cash on hand, projected FCF and $1.45 billion available on a revolver in Macau. In the U.S., MGM has not specified how it plans to fund the domestic projects but did indicate that it may prefer using its $1.2 billion revolver. MGM can also use unsecured notes to fund its domestic projects as the credit agreement permits $1 billion of additional unsecured borrowings, it said.
MGM is also planning a bid for a Japan license, but Fitch notes that heavy funding needs for a potential project there would not start until the existing pipeline is complete as it’s unlikely bid winners will be known before 2015 or 2016.