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Analyst downgrades MGM Resorts International

12 Oct 2010

By Howard Stutz
LAS VEGAS, Nevada -- One gaming analyst wasn't buying MGM Resorts International's 15 percent increase in its stock price last Friday and is predicting troubles for the Strip casino giant.

In a research note to investors before trading opened on the New York Stock Exchange Monday, Hudson Securities gaming analyst Robert LaFleur said MGM Resorts one-day price hike was due solely to the positive August casino revenues reported by Nevada gaming regulators.

On the Strip, where MGM Resorts operates 10 hotel-casinos, gaming revenues jumped 21.1 percent in August. LaFleur said the news sparked a huge rally for many shares within the gaming sector.

On Monday, shares of MGM Resorts fell 8 cents, or 0.59 percent, to close at $13.48.

"Given MGM's lingering balance sheet challenges, we find it hard to imagine a scenario where the shares stage a sustainable and meaningful breakout from these levels," LaFleur said. "The strong August data is a positive development, but it doesn't negate MGM's lingering balance sheet issues."

He said the biggest matter facing the casino operator is its $13 billion of long-term debt.

MGM Resorts Chairman and Chief Executive Officer Jim Murren has said paying down debt is the primary focus of company management and different methods are being explored.

LaFleur said the company's debt-to-cash flow ratios are a concern. He said the company's CityCenter joint venture with Dubai World could violate its leverage covenants by the end of the second quarter next year.

"MGM can't deleverage by selling assets as none of its assets are likely to fetch (the necessary) transaction multiples," LaFleur said.

MGM Resorts is planning an initial public offering on the Hong Kong Stock Exchange by the end of the year that could raise up to $500 million or more.

He told investors the IPO might not be enough. LaFleur said any future debt refinancing is likely to come at higher interest rates than the debt that is replaced.

LaFleur downgraded shares of MGM Resorts to a Hold from a Buy.

"These challenges will compete with investor enthusiasm about a recovering Las Vegas and prevent MGM's shares from moving meaningfully higher from here," he said.

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