OREANDA-NEWS. Fitch Ratings has assigned a 'BB/RR3' rating to MGM Resorts International's (MGM) announced $500 million senior unsecured notes due 2026. MGM's Issuer Default Rating (IDR) is 'BB'/Stable Outlook. A full list of ratings follows at the end of this release.

The notes will be guaranteed by substantially all of MGM's wholly-owned subsidiaries and will be on parity with MGM's existing senior unsecured notes. The proceeds along with cash on hand will be used to redeem $743 million outstanding of the 7.625% notes maturing in 2017.

KEY RATING DRIVERS

Fitch upgraded MGM's IDR to 'BB' from 'B+' in May 2016. The upgrade reflects MGM's deleveraging toward the company's target of below 5x, which will occur around 2017 per Fitch's forecast. The deleveraging has been accelerated by MGM's successful implantation of its $400 million Profit Growth Plan (PGP). MGM expects a $275 million positive impact on EBITDA in 2016 and the full $400 million to be realized in 2017. Other recent deleveraging initiatives include a $1.1 billion IPO at 76% owned MGM Growth Properties (MGP) used to reduce debt at MGM and $1.1 billion sale of 50% owned Crystals mall.

Fitch projects MGM's gross and net leverage to decline to 5.3x and 4.5x, respectively, by year-end 2017. Fitch calculated MGM's consolidated gross and net leverage as of June 30, 2016 at 6.3x and 5.4x. MGM's acquisition of incremental 4.95% interest in MGM China Holdings (valued at about $280 million as of today) in exchange for $100 million in upfront cash, $50 million deferred cash and stock in the parent company has minimal effect on leverage. (Fitch deducts distributions to MGM China's minority interests from EBITDA when calculating leverage.)

Fitch believes that gross leverage of 5x is consistent with the higher end of the 'BB' IDR category for MGM given its high-quality and relatively diversified asset mix and Fitch's positive long-term outlook for the Las Vegas Strip. Fitch will monitor MGM's track record of adhering to its publicly articulated financial policies and the continuation of stable or improving operating fundamentals on the Las Vegas Strip before considering further positive rating action.

DEVELOPMENT PIPELINE

Fitch views MGM's development pipeline favorably, especially MGM National Harbor scheduled to open December 2016. Fitch estimates $240 million in EBITDA for MGM National Harbor, a solid 18% return on a $1.3 billion investment. The project will benefit from being the closest casino to Washington DC and its affluent Virginia suburbs.

MGM is also developing an $865 million MGM Springfield, due to open late 2018. The return on investment (ROI) prospects for Springfield are less certain given the Connecticut tribes' effort to build a casino that would cut off the Hartford traffic going north to Springfield, MA. Without the Connecticut casino, Fitch estimates about $110 million of EBITDA for MGM Springfield, a 13% ROI.

MGP has the right of first offer for MGM National Harbor and MGM Springfield.

The $3.1 billion MGM Cotai development, part of the 51% owned MGM China, is scheduled to open in second quarter 2017 (2Q17). Fitch estimates the project will generate $100 million - $150 million of incremental EBITDA for MGM China after taking into account cannibalization of the existing operations from MGM Cotai and the competing projects coming online in 2016 and 2017.

MARKET OUTLOOKS

Fitch has a favorable long-term view for the Las Vegas Strip (60% of consolidated revenues) and Macau (22% of revenues) and a lackluster view for U. S. regional markets, which the agency believes are secularly challenged. Despite Fitch's somewhat negative view on the regional markets, MGM's regional assets tend to be in less competitive markets (e. g. Detroit and National Harbor) and/or are market leaders (e. g. Beau Rivage). MGM's assets also feature a heavy mix of non-gaming amenities, which Fitch believes positions the assets well against the prevailing consumer preferences.

In Las Vegas Fitch expects the growing convention business, increasing air capacity and lack of new supply to drive RevPAR higher in the near term. MGM's 50% owned T-Mobile arena (opened in April 2016) and new convention capacity at Mandalay Bay and Aria will at least in part counterbalance the center of gravity moving more north after the next wave of projects open sometime around 2019. Fitch also views MGM's $450 million rebranding of Monte Carlo favorably and expects solid ROI on the project.

Fitch expects high single digit market-wide gaming revenue decline in Macau for 2016, which assumes modest sequential growth in the mass market and leaves room for continued, but milder weakness in the VIP segment. The agency expects a more significant decline in MGM's revenues in 2016 after taking into account cannibalization from the Parisian and Wynn Palace, both scheduled to open in 2H16. Past 2016, Fitch expects mid-single-digit growth in Macau led by China's rising middle class, the new capacity in Macau and infrastructure projects in and around Macau.

ISSUE-SPECIFIC RATING

The 'RR3' recover rating (RR) on the notes reflects good recovery prospects in event of default. The RR takes into account MGM's continued ownership of Bellagio and MGM Grand Las Vegas, 76% ownership of MGP, 56% ownership of MGM China and 50% ownership of CityCenter and the unsecured notes' 15% consolidated net tangible asset (CNTA) test for additional liens.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for MGM include:

--Same-store domestic revenues grow about 2% - 3% per year on average (0% across regional properties and up to 4% at properties with high exposure to convention business);

--EBITDA margins improving to 30%. The improvement is the result of the revenue growth flow-through and gives credit to MGM's $400 million Profit Growth Plan;

--MGM China generating about $500 million of EBITDA in 2017, which factors in about $100 million EBITDA at MGM Cotai and approximately 15% EBITDA decline at MGM Macau;

--Approximately $240 million EBITDA at MGM National Harbor in 2017 and $110 million EBITDA at MGM Springfield in 2019;

--MGM does not pay a parent-level dividend through Fitch's forecast horizon (through 2019) and uses free cash flow (FCF) to fund project capex and maturities.

RATING SENSITIVITIES

MGM's IDR may be upgraded to 'BB+' if Fitch gains more confidence that MGM will reach and adhere to its leverage target of less than 5x. Stabilization of operating performance in Macau, continuation of the stable or positive trends in Las Vegas, and MGM's capital allocation policies with respect to returning value to shareholders are all factors Fitch will consider when contemplating further positive rating actions.

Fitch may revise MGM's Outlook to Negative or downgrade MGM's IDR to 'BB-' if leverage sustains at above 6x for an extended period of time past 2017, due to potentially weaker than expected operating performance, debt funding a new large-scale project or acquisition, or taking a more aggressive posture with respect to financial policy.

Fitch links MGM China's IDR to MGM's given MGM's strengthened credit profile and MGM China's strategic importance to MGM. Therefore, Fitch may upgrade MGM China's IDR to 'BB+' if and when MGM's IDR is upgraded to 'BB+'.

LIQUIDITY

MGM's liquidity is strong. Pro forma for the recent transactions, MGM's domestic liquidity covers needs through 2018 by 3.2x.

3Q16 - 4Q18 Sources:

--Cash excess of cage cash: $1.75 billion

--Revolver availability: $1.8 billion (pro forma $500 million note issuance at MGP)

--Cumulative discretionary FCF (includes MGP): $2.5 billion

--Dividends from MGM China and unconsolidated affiliates: $340 million

--Total sources: $6.4 billion

2Q16 - 4Q18 Uses:

--Maturities: $475 million (pro forma for redeeming 2017 notes)

--MGM National Harbor project capex: $425 million

--MGM Springfield project capex: $800 million

--Distributions to MGP's minority holder: $280 million

--Total uses: $2.0 billion

MGM China's liquidity is also strong with MGM Cotai being fully funded with a $1.45 billion revolver ($111 million drawn as of June 30, 2016).

FULL LIST OF RATINGS

MGM Resorts International

--IDR 'BB'; Outlook Stable;

--Senior secured credit facility 'BBB-/RR1';

--Senior unsecured notes 'BB/RR3'.

MGM China Holdings, Ltd (and MGM Grand Paradise, S. A. as co-borrower)

--IDR 'BB'; Stable Outlook;

--Senior secured credit facility 'BBB-/RR1'.