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Arnold M. Knightly

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MGM, Deutsche Bank discussing CityCenter financing

24 Feb 2009

By Arnold M. Knightly

LAS VEGAS, Nevada -- MGM Mirage and Deutsche Bank are in discussions that could give the casino company additional financing it needs to complete its CityCenter project in exchange for operating or taking ownership of the troubled Cosmopolitan project, sources said.

Both parties declined to comment Monday, but several sources confirmed the talks have been under way.

One source said Friday that the two parties were still far apart on an agreement, though.

MGM Mirage is trying to secure the remaining financing for its $9.1 billion CityCenter project, which is a 50-50 joint venture with Dubai World.

MGM Mirage, the managing partner in the project, has been paying its share of the project with company cash flow.

The mammoth 76-acre project on the Strip is scheduled to open in October.

Deutsche Bank, which acquired the Cosmopolitan for $1 billion at a foreclosure sale in August, has been in discussions with companies to operate the $3.9 billion project, which is scheduled to open in the second quarter of 2010.

According to sources who talked to the Review-Journal, Deutsche Bank would provide MGM Mirage with up to $700 million to complete the CityCenter project. In turn, MGM Mirage would either operate the Cosmopolitan, which sits on 8.5 acres bordering CityCenter, or the gaming company would take over the project in exchange for giving Deutsche Bank an equity stake in CityCenter.

Independent debt analysis firm CreditSights wrote Feb. 4 that MGM Mirage needs another $1 billion to finish CityCenter.

Brian Gordon, a principal in the local economic research firm Applied Analysis, said businesses and banks are having to become more creative in finding financing to keep their businesses running.

"Does it make sense? Certainly it could," Gordon said of the reported discussions. "I don't think you could rule it out as a possibility. Liquidity is certainly an issue in today's environment. If MGM Mirage is able to access funding through Deutsche Bank while assisting Deutsche Bank with a potential problem they have, it could be a win-win."

MGM Mirage has been struggling to complete financing for the massive Strip project as local visitation and gaming revenue numbers have tumbled.

Beyond CityCenter financing, MGM Mirage has $1.3 billion in debt maturing this fall, and another $1.1 billion that matures in 2010.

The company had $13.3 billion in debt in the third quarter ended Sept. 30, filings with the Securities and Exchange Commission show.

Credit rating services, including Moody's Investors Service and Standard & Poor's, have downgraded MGM Mirage's credit rating to "highly speculative" within the past month on fears the gaming giant will breach loan covenants in the next 12 months should visitor numbers and gaming revenues not recover.

Dennis Farrell Jr., a bond analyst with Wachovia Capital Markets, said the opening of CityCenter will cannibalize cash flow from MGM Mirage's 10 casinos on the Strip. Additionally, the opening of Fontainebleau and the Hard Rock Hotel expansion later this year could drag much-needed customers away.

"Same-store (cash flow) results will be challenged on the Las Vegas Strip for the next two years, in our view," Farrell wrote Friday in a note to investors.

MGM Mirage locally owns MGM Grand, Mandalay Bay, the Luxor, Excalibur, New York-New York, Monte Carlo, Bellagio, The Mirage, Circus Circus and Treasure Island.

The company has an agreement with former New Frontier owner Phil Ruffin to sell Treasure Island for $770 million, which will be used to pay down debt.

Rumors have swirled that the company has fielded serious offers for other properties including The Mirage and the Bellagio, but no deals have been struck.

CityCenter partner Dubai World spent $6 billion to acquire 9.4 percent of MGM Mirage's shares and a 50 percent stake in CityCenter.

The Persian Gulf state, however, has seen its credit rating fall after being hit hard by the global financial meltdown.

The United Arab Emirates, which includes Dubai as one of its seven members, pledged $10 billion over the weekend in an effort to help the financially struggling state.

Moody's said in October that Dubai may have to refinance $15 billion this year in maturing debt.

Farrell said it is unlikely that MGM Mirage majority shareholder Kirk Kerkorian or Dubai World will be making any more equity investments into the CityCenter project.

Kerkorian's investment firm Tracinda Corp., on Friday pledged the remainder of the 53 percent stock holding in MGM Mirage as collateral against the firm's $600 million credit facility. A default on the credit facility could transfer Kerkorian's shares to loan holder Bank of America Securities.

MGM Mirage has seen its stock decline from a high of $100.50 per share on Oct. 10, 2007, to close Monday at $4.27 per share on the New York Stock Exchange.

Deutsche Bank, which hired New York-based Related Cos. to finish the Cosmopolitan, needs to obtain a gaming license or find an operator to run the Cosmopolitan if it wants to continue owning the project.

An investigation for a new licensee can take a year to 18 months for gaming regulators to complete.

Dennis Neilander, chairman of the state Gaming Control Board, said Deutsche Bank has not filed an application for a gaming license, nor have any other parties connected to the Cosmopolitan.

"My understanding is Deutsche has been shopping for an operator that would seek licensure and lease the gaming operation from them," Neilander said.

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