OREANDA-NEWS. Fitch Ratings has affirmed the Issuer Default Ratings (IDRs) of MGM Resorts International (MGM) at 'B+' and MGM's Macau subsidiaries, MGM Grand Paradise and MGM China, at 'BB'. The Rating Outlook remains Positive on MGM and Stable on MGM's Macau subsidiaries. The affirmation takes into account MGM's plan to contribute 10 of its assets into a newly formed REIT subsidiary, MGM Growth Properties LLC (MGP). The full list of rating actions is at the end of the release.

MGP' assets will be leased back to MGM under a triple-net lease and MGP will assume $4 billion of MGM's debt. MGP will issue debt and equity to refinance the assumed debt with MGM owning roughly 70% of MGP pro forma for the equity raise per the company's comments. MGM will retain Bellagio, MGM Grand and Circus Circus. MGM's Maryland and Massachusetts projects will remain with MGM; however, MGP will retain a right of first offer for the projects.

Fitch expects the transaction to be largely leverage neutral for MGM - on both a consolidated and wholly-owned basis - under more conservative assumptions, namely zero equity raise at MGP. Fitch currently views MGM's credit largely on a consolidated basis, adjusting EBITDA down for income attributable to minority interest associated with MGM China. The transaction will leave the reported consolidated income statement largely the same and, as with MGM China, Fitch will subtract income attributable to MGP's minority interest.

Pro forma LTM consolidated leverage (assuming zero equity raise) increases from 6.9x to 7.0x, but has a chance to decline into the mid-6x range depending on amount of equity raised. On a wholly-owned basis, rent adjusted leverage declines to 7.8x from 7.9x without giving credit to dividends from the unconsolidated entities - CityCenter, Borgata or Grand Victoria.

MGM remains on a trajectory to a 'BB-' IDR as its consolidated leverage approaches 5x. Fitch expects leverage to start approaching 5x in 2017 when MGM National Harbor and MGM Cotai open. However, Fitch could upgrade MGM's IDR to 'BB-' sooner as its path towards 5x becomes more clear. When considering an upgrade, Fitch will weigh the execution of the REIT transaction and Macau's operating trends, which seem to be stabilizing. MGM demonstrating progress with its $300 million Profit Growth Plan, which is not incorporated into Fitch's forecasts, can also be a catalyst for an upgrade. Conversely, Fitch could revise MGM's Outlook to Stable if Macau's operating environment worsens or the cannibalization from the new Cotai resorts is worse than Fitch anticipates.

An upgrade of the IDR to 'BB-' would have no impact on MGM's issue specific ratings with the credit facility likely maintaining its 'BB+/RR1' and the unsecured bonds 'BB/RR2' ratings. This is because Fitch compresses the recovery-related notch dispersion around the IDR in the 'BB' category. Fitch expects MGM to refinance the $2.7 billion outstanding on the existing U.S. facility with the MGP transaction, given the facility's lack of prepayment penalties and its restrictive covenants. Fitch suspects that MGM will further target a portion of the $1.5 billion of unsecured notes coming due in 2016. The bonds' sale-and-lease covenants do not apply, since the covenant restrictions exclude transactions with majority-owned subsidiaries.

Pro forma for the MGP transaction Fitch expects the recovery prospects for MGM's unsecured bonds to remain strong. The bonds will continue to benefit from tight lien covenants, MGM's ownership of Bellagio and MGM Grand, and MGM's equity interest in MGM China, MGP and unconsolidated entities. Fitch estimates better than 90% recovery for the bonds pro forma for the transaction. Key recovery assumptions include $1 billion of new secured debt at MGM used to fund U.S. development capex; 10x EBITDA/EV multiple and $4 billion of debt at MGP; and 1.9x rent coverage for MGM's OpCo assets and 25%-30% stress on LTM EBITDA pro forma for leases.

Key Assumptions

--MGM's consolidated revenues decline by 8% in 2015 reflecting a 32% decline at MGM China. Same-store revenues grow in the low- to mid-single digit range thereafter. Fitch assumes $750 million, $825 million and $450 million of incremental revenues from MGM Cotai (250 tables assumed), MGM National Harbor and MGM Springfield, respectively. Fitch estimates property EBITDA margins of about 24% for MGM through the projection horizon. The Profit Growth Plan is not factored into Fitch's forecasts.

--MGM starts to pay $500 million per year in dividends in 2018; MGM China dividends is $400 million in 2016 and $700 million thereafter; MGM applies cash on hand and all FCF to pay down debt until 2018; MGM receives $80 million from the CityCenter project per year, and no other development capex is undertaken.

RATING SENSITIVITIES
Fitch sees MGM's IDR migrating towards the 'BB' category as its consolidated leverage becomes more comparable to its global peers. We believe this would occur as gross leverage starts to migrate towards 5x on gross basis, which occurs around 2017 in our forecast. The upgrade would be predicated on Fitch's belief that MGM wants to maintain solid balance sheet strength, something that is consistent with the company's remarks on its 3Q15 earnings call.

Fitch would consider revising the Outlook to Stable or Negative if Macau's operating stabilization is derailed or Las Vegas' operating trends reverse meaningfully. The Outlook can also be revised if MGM demonstrates more aggressive shareholder-friendly activity than is now anticipated by Fitch. MGM China's and MGM Grand Paradise's IDRs maintain headroom for further upward rating pressure should conditions in Macau stabilize and MGM Cotai ramps up as expected.

FULL LIST OF RATINGS

Fitch has affirmed the following:

MGM Resorts International
--IDR at 'B+'; Outlook Positive;
--Senior secured credit facility at 'BB+/RR1';
--Senior unsecured notes at 'BB/RR2'.

MGM China Holdings, Ltd and MGM Grand Paradise S. A. (co-borrowers)
--IDRs at 'BB'; Outlook Stable;
--Senior secured credit facility at 'BBB-/RR1'.