6.26.06
Troubled Company Reporter"The downgrade reflects Standard & Poor's assessment that the combination of weaker-than-expected operating performance during 2005, a highly competitive operating environment in the Detroit market, and high debt levels associated with the ongoing expansion project, have resulted in higher-than-expected near-term peak debt leverage that would no longer be consistent with the former rating," said Standard & Poor's credit analyst Michael Scerbo.
MotorCity Casino has been valued at roughly $1 billion by Crain’s Detroit Business. However, to finance the $525 million buyout of MGM Mirage/Mandalay Resort and others in 2005, Forbes indicates Ilitch had to borrow $950 million: $300 million in junk bonds, yielding 8%, and $650 million in fixed- and variable-rate bank debt. Close to $1 billion has been “borrowed” on a casino that’s estimated to be worth $1 billion suggesting MotorCity’s debt to value ratio is approximately 100%.
Ilitches’ acquisition of MotorCity was nearly 100% debt financed, much like their original 1992 acquisition of the Detroit Tigers ball club. That was followed by construction of a 30% taxpayer financed Comerica Park. The Stadium is a cornerstones of the Ilitches’ concentation of slow moving downtown Detroit development. The Ilitches funded the other 70% of Comerica Park using debt financing too. The team has lost money nearly every year since 1993.
Analysts believe that MotorCity’s debt is currently more than 8x its annual operating income, already higher than estimated in the 2005 prospectus announcing the $950 million capital offering. In other words, owners would not realize any profits for at least eight years, the amount of time estimated needed to repay debtors.
Marian Ilitch formed CCM Merger, Inc. in order to buyout the interests of Mandalay Resort/MGM Mirage (Circus Circus Michigan) and take total control of MotorCity Casino, a dba for Detroit Entertainment LLC.
The new credit ratings raise the possibility that holders of $300 million in junk bonds will not be repaid.
Michigan state regulations only permit ownership interest in one casino. When MGM Mirage wanted to acquire Mandalay Resort Group in 2005, the companies were forced to sell one of two Detroit Casinos – either MGM Grand Detroit or MotorCity and the two Las Vegas powerhouses agreed to sell MotorCity Casino and keep MGM Grand Detroit in their portfolio.
In additional actions, Moody’ s credit ratings for MotorCity Casino’s parent were tagged with a Negative Outlook indicating that if anything unexpected happens in the local market, regional economy, casino operations or expansion the next move would certainly be a drop in credit rating.
Standard & Poor's, a division of The McGraw-Hill Companies (NYSE: MHP), is the world's foremost provider of financial market intelligence, including independent credit ratings, indices, risk evaluation, investment research and data.
Moody's Investors Service is among the world's most respected, widely utilized sources for credit ratings, research and risk analysis. Moody’s publishes market-leading credit opinions, deal research and commentary, serving more than 9,000 customer accounts at some 2,400 institutions around the globe.
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