MGM faces bankruptcy risks

In the report dated August 2, the firm’s analyst said MGM made big leveraged bets on China and Vegas through extensive expansion into Macau and the construction of the City Center complex. “With slowdowns in both China and the spending habits of visitors to Las Vegas, MGM may be setting itself for a huge fold into possible insolvency and bankruptcy.

Due to MGM’s cash flow risk and the risk of a further economic downturn, the report called for a close watch of its cash flow situation for potential bankruptcy. “The red flag that stood out to me about MGM is its weakening ability to cover its interest obligations,” it said.

“With a debt-to-equity ratio at a stratospheric 2.27, MGM is overloaded with debt, along with increasingly climbing interest expenses. MGM’s current annualized interest expense is us$ 1.1 billion, which is far higher than its debt level in the 2008 economic downturn. On a per-share basis, this translates to us$ 2.33 on an annual basis. MGM’s Q1 free cash flow is us$ 231 million, and can possibly deteriorate further on economic weakness.”

The report said even assuming that cash stays marginally positive over the next three years, MGM is still a bankruptcy risk. With us$ 2.33 per share in interest expense and only us$ 3.34 of cash reserves per share, MGM only has 1.44 years’ worth of interest payments in cash until it cannot pay back debt obligations. Even with the highly leveraged gaming industry, this figure is weak; competitors such as Las Vegas Sands and Wynn have 15.83 and 24.59 cash/interest payment ratios respectively.

“In addition to cash flow problems, economic factors are working against MGM and the gaming industry. A recent release of weak earnings from LVS confirms the slowdown in gaming spending in both Singapore and Macau. Unless MGM sells its assets to deleverage, or earnings turn around significantly in Macau and Las Vegas, the firm has serious risks of bankruptcy within the next two years.”