A major debt-rating service says business trends appear to be strong for two big Las Vegas casino resort operators.
A strong opening at Mandalay Resort Group's massive Mandalay Bay Convention Center, positive expectations for a new hotel tower at the resort and improving room booking trends in Las Vegas are among the factors that led Moody's Investors Service to lift the company's debt ratings outlook Friday from where they had dropped after the Sept. 11 terrorist attacks.
Separately, Moody's on Monday assigned a "Speculative Grade Liquidity" rating of SGL-3 to Venetian Casino Resort LLC, noting that the resort's new hotel tower is showing strong, near-term bookings.
The resort opened its 1,013-suite tower last week in addition to a 150,000-square-foot expansion of its Venetian Congress Center, including three ballrooms, 64 meeting rooms and three boardrooms.
As of March 31, The Venetian has booked about 28 percent more rooms for the remainder of 2003 versus the same period last year, Moody's said. Early 2004 bookings have also improved over last year.
Lower capital spending requirements on the horizon at Mandalay Resort Group in fiscal 2005 also factored into the decision by Moody's to upgrade the company's ratings outlook to "stable" from "negative."
Moody's said it expects these factors will boost Mandalay's free cash flow, allowing the company to use the cash to pay down debt over the next two to three years.
The convention center has helped "significantly improve room rates" at Mandalay Bay and Luxor and, to a lesser extent, at Mandalay's Excalibur resort, Moody's said.
The three resorts contribute about 50 percent of the company's cash flow at the property level, the agency said.
Cash flow -- typically defined as earnings before interest, taxes, depreciation and amortization -- is a key indicator of casino performance.
Mandalay Bay's 1,122-suite tower, anticipated to open this fall, is expected to further boost room revenue and mid-week rates, the agency said.
Mandalay built the tower to feed its convention center with business travelers as well as high-end tourists. Mid-week rates generally lag weekend rates, when hotels fill to accommodate leisure travelers.
"One of the primary concerns with respect to assigning a negative ratings outlook in December 2001 had been the possibility of a slower-than-expected ramp-up of the convention facility given the Sept. 11 terrorist attacks and an already slowing economy," Moody's said.
Mandalay's debt leverage, still considered high for the current rating category, won't improve in fiscal 2004 primarily because of the company's significant spending activity during the year as well as weakness at the company's non-Las Vegas properties, the agency said.
Mandalay is expected to spend in the neighborhood of $350 million on capital expenditures and about $100 million on share repurchases in fiscal 2004, it said.
As the company winds down its spending projects, its debt load is expected to decline to 4.5 times cash flows by the end of fiscal 2006 from where it now sits at five times greater than its annual cash flows, it said.
Aggressive share repurchases helped drive up the company's debt to current levels, compared to only 4.1 times cash flows during the 2002 fiscal year, the agency said.
Earlier this month, Mandalay announced it would issue its first-ever quarterly dividend to shareholders. Some Wall Street analysts upgraded their ratings on the company's stock, which boosted the company's shares and those of its peers. The dividend marked a vote of confidence that the company is able to generate significant free cash flow and is also a sign of the recovering Las Vegas economy, analysts said.
Mandalay Resort Group should begin generating "significant free cash flow" following the opening of the new hotel tower at Mandalay Bay to the tune of $220 million in 2004, casino equities analyst Todd Jordan of Buckingham Research Group said in a research note to investors this month. The dividend will cost the company about $55 million a year, leaving a sizeable chunk of cash left over to buy back stock and pay down debt, Jordan said.
John Kempf, a bond analyst with Goldman, Sachs & Co., said the dividend wouldn't increase risk for bondholders.
"Management is substituting one form of returning capital to shareholders (dividends) for another (repurchasing stock)," Kempf said in a research note this month. "Thus, we do not expect Mandalay to increase borrowing in order to make the dividend payments."
Still, the company is more highly leveraged and its casinos are less diversified than competitors including MGM MIRAGE, Park Place Entertainment Corp. and Harrah's Entertainment Inc., he said.
The company has been dependent "on essentially one property" for its success -- the luxury Mandalay Bay resort, he added.
Moody's also assigned a Ba2 rating to the company's $400 million, floating-rate convertible senior secured debt due 2033. The rating is considered speculative grade, or in the "junk bond" category.
The Venetian is expected to generate enough cash flow -- together with available cash and bank loans -- to meet its current debt payments over the next 12 months, Moody's said.
The ability to borrow additional funds will be restricted by covenants in the company's first mortgage note, the agency said.
Still, the company is expected to generate positive free cash flow over the next year, based on returns from the new tower and strong convention bookings, it said.
"At the same time, however, Venetian's near-term operating cash flow performance remains vulnerable to pressure on room rates owing to intense competition and probable lower table hold."
The company has benefited over the past two quarters from high table hold -- an indicator of how much the casino wins from gamblers.
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