Posted on: March 20, 2024, 12:49h.
Last updated on: March 20, 2024, 12:57h.
MGM Resorts International’s (NYSE: MGM) noninvestment-grade credit rating of “B1” was affirmed by Moody’s Investors Service, which maintained a “stable” outlook on the gaming company’s credit profile.
The “B1” grade is four notches into junk territory on Moody’s scale, and bonds with that rating are considered “highly speculative” by the research firm. MGM generated free cash flow of $1.8 billion in 2023 and concluded the year with $2.92 billion in cash and cash equivalents on hand. The Bellagio operator has $6.34 billion in long-term debt. Moody’s mentioned the issue of elevated leverage and long-term rental commitments.
The rating is constrained by the company’s high leverage, including the company’s sizeable leases on the balance sheet,” noted the research firm. “Moody’s expects MGM will actively pursue large integrated resort development projects that would result in elevated leverage for some time until it completes the project.”
The ratings agency added that the “stable” outlook on MGM reflects strength in the operator’s Las Vegas Strip and regional casino segments as well as ongoing recovery in Macau, which is supportive of MGM China. MGM controls 56% of the Macau unit.
MGM Credit Rating Not an Outlier in Casino Industry
MGM’s junk credit rating isn’t a negative commentary specific to the company. Rather, such credit grades are common across the gaming industry.
That’s the result of casino gaming being a capital-intensive field and some operators, including those with Macau exposure, taking on debt to survive during the darkest days of the coronavirus pandemic. Despite its noninvestment-grade credit rating, MGM’s free cash flow position is solid and it bought back $2.3 billion worth of its shares last year.
Some investors believe the stock is undervalued and view it as a prime beneficiary of consumers favoring experiences over goods, a factor viewed as a catalyst behind the steady stream of impressive gross gaming revenue (GGR) data out of Las Vegas.
“MGM Resorts International’s (B1 stable) credit profile reflects the company’s large scale, strong presence on the Las Vegas Strip, and a solid position within several regional markets across the US,” added Moody’s.
How MGM Credit Rating Could Rise or Fall
As is the case with many gaming companies, MGM probably isn’t in a position for a near-term upgrade of its credit rating, but that’s not an impossibility, either.
Ratings could be upgraded if the company generates consistent positive free cash flow, debt-to-EBITDA is sustained below 6.0x, and the company maintains a balanced financial policy with respect to shareholder returns, including share repurchases,” observed Moody’s.
A move to investment-grade territory could take some time to materialize for MGM. Regarding the possibility of a downgrade, Moody’s said that would be a possibility if the casino giant’s liquidity is pinched, if earnings before interest, taxes, depreciation, and amortization (EBITDA) declines, or if debt/EBITDA ratios increase.