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MGM Mirage: Next Shoe to Drop – Defaults at CityCenter (Actionable Short Alert) - Citi

 February 03, 2009 10:35 AM

Citigroup is out with a killer call on MGM Mirage (NYSE:MGM) initiating the stock with a Sell rating and a $2.50 tgt.

20-30% default rate at CityCenter? — Completion of this mega-project could not come at a worse time for MGM. To date, 55% of condo units have been sold, with only 20% deposits being received. Considering estimated spot prices have fallen 33% since the pre-sales (peak), Citi's base case is a 20-30% default rate. Analysis shows if prices fell a further ~15-20% from current levels, the condo projects will be loss making (the Mandarin condos aside).

Las Vegas already on life support — With 60% of Las Vegas revenues now coming from non-gaming revenues, weaker discretionary spending has a greater impact on the Strip. As 80% of MGM's revenues come from Las Vegas, the firm forecasts MGM's LV Strip EBITDA to decline 32% to $1.1b in 2009E – with an EBITDA margin of 21.5%, 640bps below a 2008E margin of 27.9%.

Dependent on revolver — To avoid violating its 7.5x Debt to EBITDA covenant, they calculate the group needs to generate $1.84b in 2009 EBITDA, vs. estimate of $1.39b. On Citi's thesis of a 20% condo default rate, they estimate the group will be sitting on $13.8b in debt. At this stage, debt maturity in 2009 and 2010 can be met by MGM's $7b revolver but they do not rule out assets sales, with Mandalay Bay and Bellagio as potential targets.

Target price at $2.50 — Firm ascribes a 7x EBITDA value for the group's gaming assets (the mean valuation of US players). With $15.4bn in debt (including unconsolidated JVs), they struggle to find any equity value for the group. They are 24% below the Street on 09E EBITDA and 30% below on 10E EBITDA.

Notablecalls: So this is why the casino stocks have been so weak of late. I suspect anything above the $7.00 level is an Actionable Short in MGM.

I see the stock trading towards $6 level in the very near term as fear sets in. There is very little MGM can do to better their situation. I don't think they can pull off a deal similar to LVS to keep them afloat around current levels. Best case seems to be a way below mkt offering with huge dilution.


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