Terry Lanni’s decision to retire last November as chairman and chief executive of MGM MIRAGE was either prescient or well judged.
There’s nothing like going out at or near the top. That applies even if it’s only to protect your bonus or pension payments from the increasingly vociferous investors and governments looking for scapegoats in the current recessionary turmoil.
MGM MIRAGE’s current CEO Jim Murren is the one left in the hot seat after the company announced this week its whopping USD1.15 billion loss for the fourth quarter of 2008. This is mere tinder sticks compared to the eye-watering USD6.2 billion in cash the troubled US car maker General Motors burned through in the last three months of last year, on the way to a record quarterly loss of USD9.6 billion.
The fact remains though that it was Mr Lanni and not Mr Murren who was i/c when the huge debt on MGM MIRAGE’s CityCenter project was first contracted. It currently stands at USD8.6 billion. That figure will inevitably rise even if the company struggles through. The corporation has just been asked to pay an extra 100 basis points (i.e., one percent) on its senior credit facility as the price of continued largesse on behalf of its creditors.
Hindsight is of course a wonderful thing, and in Mr Lanni’s defence it’s fair to point out that prior to the autumn of 2008 leveraging on many real estate projects in North America and Europe was a little like adultery in the suburbs—lots of people were at it, but few gave extensive thought as to the long-term consequences.
MGM MIRAGE’s position looks even more precarious when a USD1.18 billion charge related to the declining value of several recent acquisitions is added to the picture, taking the company’s quarterly loss to USD$4.15 per share.
MGM MIRAGE executives said in a conference call with investors on Tuesday that the company repaid USD300 million to its lenders in exchange for relief from its loan payment obligations. The breathing space will last until 15th May.
With such big sums at stake, lenders come in all shapes and sizes, and a condition of what in effect is more short-term credit for MGM MIRAGE is that it should not be used to buy back long-term debt. That would be unlikely to make financial sense in any case without extensive balance sheet liquidity, given that short-term money is far more expensive than long-term money. And if MGM MIRAGE had liquidity it wouldn’t need such short-term money, so the current circle the company finds itself in is more vicious than virtuous.
Last week AGI reported on the possibility of some kind of fire sale of MGM MIRAGE assets, including whatever equity has been built up in its 50 percent stake in the MGM Grand Macau casino. Mr Murren quashed any such notion—at least for the time being—during the conference call.
“The amendment we have signed restricts us from repaying or repurchasing our long term debt and limits our ability currently to sell assets. But importantly we have not provided any collateral to obtain this short term waiver,” he added.
During the call Mr Murren did his best to ‘accentuate the positive and eliminate the negative’, to quote from an old Bing Crosby song.
“We are very pleased that our lenders have worked with us to obtain this waiver and amendment [on debt covenants]. It is just the first step, but an important step, toward developing a comprehensive, long term solution to our liquidity issues,” stated Mr Murren.
He did though add words of caution, given that the deal only gives the company a temporary breathing space.
“Following the expiration of the waiver we will be subject to an event of default under our senior debt facility if we are not in compliance with our financial covenants as of March 31 this year. In the event of such default our lenders could take several actions, including demanding repayment of all our outstanding borrowings. So we intend to work with our lenders in the next two months to address these issues.”
We bet they do. Under MGM MIRAGE’s current dire circumstances another line from Mr Crosby’s song comes to mind.
‘Latch on to the affirmative. Don’t mess with Mr In-Between’
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