Fitch Rates MGM MIRAGE’s $750MM Secured Notes ‘BB’; Comments on Liquidity Profile

Fitch Ratings has assigned a rating of ‘BB’ to MGM MIRAGE’s 13% $750 million senior secured notes due 2013. MGM’s ‘BB-’ issuer default rating (IDR), ‘BB-’ senior unsecured rating, and ‘B’ senior subordinated rating were affirmed. MGM’s Rating Outlook is Negative.

The $750 million issue was priced at 93.132% on October 31, 2008; a discount that resulted in a 15% yield and net proceeds to MGM of $687 million, which will be used to repay a portion of MGM’s $7 billion credit facility and for general corporate purposes. The transaction is expected to close on Nov. 14, 2008. Separately, in October 2008, MGM received notice of a put option from substantially all holders of Mandalay Resort Group’s $150 million 7% debentures due 2036, which requires MGM to repurchase the debt on Nov. 15, 2008. Therefore, MGM’s net increase in liquidity after consideration of the discount and bond repurchase is $537 million.

The ‘BB’ senior secured note rating reflects a one-notch differential from MGM’s ‘BB-’ IDR, which Fitch downgraded on Oct. 22, 2008. The one-notch differential incorporates the issue’s first lien security interest in MGM’s New York-New York property, which generated $126 million in LTM adjusted EBITDA as of Sept. 30, 2008. In addition, the secured notes will be guaranteed by all domestic subsidiaries that provide guarantees for MGM’s bank facility, senior unsecured and subordinated debt.

MGM’s ability to access capital markets and enhance its liquidity somewhat mitigates Fitch’s concern regarding debt maturities of $1.3 billion in 2009 and near-term CityCenter funding requirements. However, MGM’s longer-term liquidity profile and near-term operating environment remain concerns, as indicated in ‘Liquidity Focus: U.S. Gaming & Lodging’, dated Oct. 23, 2008, and ‘Fitch Downgrades MGM’s IDR to ‘BB-’; Outlook Remains Negative’, dated Oct. 22, 2008. MGM reported an 18% decline in comparable property EBITDA in Q3′08, following a 12% decline in Q2′08. Fitch expects the weak operating environment in Las Vegas to continue for at least the next few quarters.

The second phase of the $3 billion CityCenter financing still needs to be completed, as only $1.8 billion has been finalized to date. MGM has an additional $1.1 billion of bond maturities in 2010, prior to $532 million of bond maturities in 2011, and the October 2011 expiration of its $7 billion credit facility, of which $5.7 billion was outstanding as of Sept. 30, 2008. It is a credit positive that MGM was able to access the capital markets in this environment. However, Fitch believes the adverse terms, including the high interest cost and required collateral, indicate that MGM’s access to capital on an unsecured basis remains extremely limited, if not effectively closed.

MGM’s credit facility permits liens on assets with a fair market value of up to 5% consolidated net tangible assets. The lien carveout was reduced to 5% from 10% as part of MGM’s credit facility amendment dated Sept. 30, 2008, which provided MGM with some covenant relief, as the permitted leverage ratio was increased to 7.5 times (x) through the end of 2009 from 6.5x. Fitch calculates MGM’s consolidated net tangible assets balance as of Sept. 30, 2008 was nearly $21 billion, so it can encumber assets with a market value of roughly $1.05 billion. Therefore, MGM’s ability to issue additional secured debt is limited by this issuance, the extent depending on the market value assigned to New York-New York. MGM’s bonds contain a 15% consolidated net tangible asset carveout, so there could be additional secured debt capacity if terms of the credit facility were revised. MGM’s $7 billion credit facility expires in October 2011.