NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned 'BB/RR2' ratings to MGM Resorts International's (MGM) announced $1 billion senior unsecured notes due 2023. Fitch upgraded MGM's IDR to 'B+' from 'B' in September 2014 and maintained MGM's Positive Outlook.

MGM plans to use the note proceeds for general corporate purposes, including repaying certain debt maturing in 2015 and funding a portion of the development costs related to MGM's Maryland and Massachusetts projects.

KEY RATING DRIVERS

Overall Fitch views the issuance positively as it largely addresses MGM's liquidity needs through the development phase of the company's projects in Macau ($2.9 billion), Maryland ($1.2 billion) and Massachusetts ($800 million). The issuance should be largely leverage neutral if MGM uses the proceeds to refinance $875 million in 6.625% senior notes that come due in July 2015.

Pro forma for the proposed notes issuance, MGM's available liquidity will be $4.5 billion relative to its $5 billion development pipeline and $2.4 billion of maturities coming due through 2016 (excluding the 4.25% convertible notes coming due 2015). Fitch now estimates that MGM will need to access approximately an additional $500 million in capital to meet its funding needs through 2016, taking into account FCF at the wholly-owned group and dividends from Macau. This should be manageable given MGM's improving financial profile and historically good access to capital markets as well as Fitch favorable long-term outlook for the Las Vegas Strip and Macau.

Fitch's recent upgrade of MGM's IDR to 'B+' and the Positive Outlook reflect the company's strong performance on the Las Vegas Strip and in Macau. The rating actions also took into account MGM's improving FCF profile bolstered by the company's distributions from MGM China and declining interest expense. The increased probability that MGM's $1.45 billion of 4.25% convertible notes will convert by April 2015 and the growing equity value of MGM's stake in CityCenter are also positively factored into the IDR.

Pro forma for the proposed issuance and the refinancing of the 6.625% notes MGM's consolidated leverage adjusted for income attributable to minority interest is manageable at 6.7x for LTM period ending Sept. 30, 2014 versus 7.2x and 8.6x for same periods in 2013 and 2012, respectively. The improvement is driven by EBITDA growth on the Las Vegas Strip (10% compounded annual growth rate since the 2012 LTM period) and in Macau (13% growth rate). Debt also declined to $12.9 billion as of Sept. 30, 2014 from $13.9 billion two years ago with MGM using its domestic FCF and MGM China dividends to paydown debt.

Fitch projects MGM's leverage to continue to decline even as the company funds its $5 billion development pipeline. In Fitch's base case projection, U.S. debt declines by approximately $1.3 billion from Sept. 30, 2014 through 2016. This incorporates $1.4 billion of cumulative FCF including Macau dividends and the conversion of $1.45 billion in notes to equity (about a 17% cushion in stock price relative to the conversion price).

Consolidated leverage adjusted for minority interest income improves to 5x by year-end 2016, which is consistent with the lower-end of the 'BB' category given MGM's segment exposure.

In Fitch's projections growth on the Las Vegas Strip offsets the recent softness in Macau until 2016 when MGM's projects start to come online. Fitch's 2016 EBITDA forecast includes half a year of MGM Cotai ($660 million full year EBITDA estimated). Fitch estimates EBITDA for MGM National Harbor and MGM Springfield at roughly $240 million and $120 million, respectively. In 2017, the first full year of the projects being open, leverage could potentially decline to below 4x if the company remains committed to debt reduction.

Fitch remains positive on the Las Vegas Strip outlook, especially relative to other U.S. markets. Fitch projects that the market will manage mid-single-digit RevPAR and low single-digit gaming revenue and visitation growth over the next two to three years. Fitch is forecasting negative 1% gaming growth for Macau in 2015, which is largely driven by the expected weakness in 1H15. Longer-term, Fitch remains favorable on Macau, as Fitch continues to hold that Macau and the greater China market remain underpenetrated and expects gaming revenue growth to be driven by new supply and infrastructure development. The Chinese economy will continue to grow (6.8% in 2015 and 6.5% in 2016), anchoring mass market demand.

DEVELOPMENT PIPELINE

MGM's $5 billion project pipeline is among the largest in the gaming industry. The $2.9 billion project in Macau is fully funded between cash on hand, projected FCF and $1.45 billion available on the revolver in Macau. Fitch believes the U.S. projects will be funded on the balance sheet of the U.S. credit group. This view reflects today's announcement and the company's stated intention to use its $1.2 billion corporate revolver.

While funding the U.S. projects on its balance sheet increases the short-term liquidity risk longer-term the projects, particularly the one in Maryland, will enhance MGM's credit profile by diversifying the company away from the Las Vegas Strip. MGM started construction on the Maryland project this past summer and will start on the Springfield project in spring of 2015.

Fitch views the Maryland project favorably from a return on investment (ROI) point of view, even after accounting for the increased $1.2 billion budget. Fitch estimates 14% - 20% ROI in Maryland. The high ROI reflects MGM's position as the closest casino to the D.C. area including the affluent Washington D.C. suburbs in Virginia. Fitch is less optimistic on the Springfield proposal considering the licensing and host community fees as well as a less attractive supply/demand dynamic. However, Fitch still estimates 9% - 15% ROI for the Massachusetts project, which is an acceptable ROI for a domestic gaming investment relative to the recent comparison set.

ISSUE SPECIFIC RATINGS

MGM's unsecured notes rating of 'BB/RR2' incorporates MGM's 51% stake in MGM China, increasing equity value in the 50% owned CityCenter and the unsecured notes' 15% consolidated net tangible asset (CNTA) lien test. The 'RR2' recovery rating is consistent with an estimated recovery range of 71% - 90% and results in a two notch differential from MGM's 'B+' IDR. Should Fitch upgrade MGM's IDR to 'BB-', MGM's unsecured notes could remain at 'BB'. This is because Fitch tends to compress the recovery related notching on issues relative to the issuer's IDR as the IDR migrates upwards.

RATING SENSITIVITIES (Fitch's forecasts in the parentheses)

Positive: Future developments that may, individually or collectively, lead to positive rating action include:

--Consolidated leverage adjusted for minority interest income approaching 5x (FY15: 6.4x and FY16: 5.0x);

--Domestic discretionary FCF after MGM China dividends being above 5% of domestic debt (FY15: 6% and FY16: 8%);

--Reversal of negative revenue trends in Macau and continuation in positive or stable trends on the Las Vegas Strip.

--Continued commitment to improving balance sheet.

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

--Consolidated leverage adjusted for minority interest income increasing above 7x for an extended period of time (8x through the development cycle) (FY15: 6.4x and FY16: 5.0x);

--Domestic discretionary FCF after MGM China dividends declining below 2% of domestic debt (FY15: 6% and FY16: 8%);

--Extended operating pressure in Macau and/or sharp reversal of improving trends on the Las Vegas Strip; and/or

--Greater uncertainty with respect to MGM's ability to refinance near-term maturities.

Fitch rates MGM's as follows:

MGM Resorts International

--IDR 'B+'; Outlook Positive

--Senior secured credit facility 'BB+/RR1';

--Senior unsecured notes 'BB/RR2';

--Convertible senior notes due 2015 'BB/RR2'.

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

--IDRs 'BB'; Outlook Positive;

--Senior secured credit facility 'BBB-' (includes $1.45 billion revolver and $550 million term loan).

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage' (May 28, 2014);

--'Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers' (Nov. 19, 2013);

--'U.S. Leveraged Finance Spotlight -- MGM Resorts International' (Sept. 25, 2014);

--'U.S. Gaming Recovery Models - Second-Quarter 2014' (Sept. 26, 2014);

--'Fitch 50 (Structural Profiles of 50 Leveraged U.S. Credits)' (July 8, 2014);

--'U.S. Regional Gaming: Long-Term Headwinds Abound (A Study of Secular Trends in U.S. Regional Gaming)' (Jul. 21, 2014).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers - Effective from 19 November 2013 to 18 November 2014

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=721836

U.S. Leveraged Finance Spotlight -- MGM Resorts International

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=772368

U.S. Gaming Recovery Models --- Second-Quarter 2014

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=778768

Fitch 50 (Structural Profiles of 50 Leveraged U.S. Credits)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=752040

U.S. Regional Gaming: Long-Term Headwinds Abound (A Study of Secular Trends in U.S. Regional Gaming)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=751939

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=929816

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