MGM Mirage Facing Breakup

--market slowdown is taking a toll on highly leveraged gambling industry --gambling industry debt over earning is around 7 while the leverage of the next most leveraged industrials - industrials, utilities, and consumer cycylicals - is less than 4. By JEFFREY MCCRACKEN and TAMARA AUDI Kirk Kerkorian's gambling empire MGM Mirage could be chopped into pieces, as the debt-strapped company races to negotiate new terms with lenders to avoid defaulting on its debts, according to people familiar with the matter. Potential buyers have been sizing up a purchase of the Bellagio casino as well as the MGM Grand Detroit, one of a handful of casinos in the country that is performing well. MGM has discussed selling the Bellagio but so far could not garner an attractive price, according to people involved in the discussions. "Basically everything MGM owns is for sale," said one of the people familiar with the situation. The company recently agreed to sell its popular Treasure Island casino hotel in Las Vegas to casino magnate Phil Ruffin for $775 million. The company declined to comment. MGM needs to raise more than $1 billion to fund what it regards as its future: a massive, 67-acre resort and residential project in Las Vegas called City Center. But it must reduce debt it built up this decade. The Las Vegas-based company has $1.27 billion in bond payments due later this year, in addition to about $674 million in existing interest payments. Conditions have gotten dire as MGM's annual cash flow has tumbled to an estimated $1 billion this year from roughly $2 billion in 2007, say people familiar with the matter. On Friday, the company was negotiating with a group of lending banks to hand up to $2 billion in liens directly on MGM Mirage assets, those people said. That would put the banks ahead of other creditors, largely bondholders, should the company file for bankruptcy protection. Such a move could eventually force MGM to hand over certain properties to the banks. MGM's hope is that the new liens will buy it some time. The hope is to induce the banks to waive a lending requirement that MGM be judged a "going concern" by its auditors. Investment bank Evercore Partners has been hired by MGM to negotiate with lenders. It declined to comment. Kirk Kerkorian Mr. Kerkorian's 149 million shares were worth $14.9 billion in October 2007, when the stock was trading at a high of $100.50 per share. Shares finished at $3.45 Friday on the New York Stock Exchange. Mr. Kerkorian's shares are now worth around $500 million dollars. MGM's predicament underscores just how ravaged the gambling industry has become. While many industries are trying to shrink their debt loads, few borrowed more, and now grapple with harder choices, than the casinos. The country's 18 largest casino companies -- including giants like Harrah's Entertainment Inc. and Las Vegas Sands -- are buckling under the weight of more than $65 billion in long-term debt. Casinos on average now owe $7 of debt for every dollar they project to earn. By comparison, the next most leveraged industries -- industrials, utilities and consumer cyclical -- are all levered at less than four times earnings, according to investment bank Houlihan Lokey Howard & Zukin. Some of the industry's high rollers such as Harrah's Entertainment and Las Vegas Sands owe $9 for every dollar of projected earnings. This is double the ratio of the last downturn in 2001 -- and could be worse as earnings continue to fall faster than even worst-case projections. "I've never seen it so levered and I've been tracking it for 35 years," said Dennis Forst, KeyBanc Capital Markets Inc. gaming analyst who calculated the ratios. "Banks were too generous and lent too much on too much optimism about the value of land. These casinos are underwater, much like our country's homeowners. But casinos aren't very sympathetic figures so no one is going to ride in with a bailout." The industry's largest player, Harrah's, is scrambling to convert much of its $23 billion of debt into new equity. That debt was piled on when a pair of private-equity firms purchased the company at the height of the credit boom in 2007. Most of its bonds are trading at between 5 to 25 cents on the dollar, suggesting the market expects a default. Much of the debt was issued on the premise that land underneath casinos would continue to rise in value, and casino profits would hold steady in a downturn. That confidence enabled the casino operators to embark on a real-estate buying binge, aided by Wall Street's ability to repackage and sell real estate bonds. The billions bankrolled a high-stakes land grab. Prices for an acre of land on the Las Vegas strip jumped from $7.6 million per acre in 2004 to $17.7 million in 2006 and then $19 million per acre in 2007, according to investment bank Jefferies & Co. Off the strip, an acre of land doubled from around $4 million in 2004 to more than $8 million in 2006-07. Many of the casino loans were relatively cheap, with very few covenants or restrictions on lending. "Companies had tons of liquidity but many wasted it by going long on land, racing to scoff up land before their competitors," said Daniel Aronson, a Lazard Ltd. managing partner who advises several casinos on their turnarounds. As Las Vegas roared back to life after the September 11 terrorist attacks, double-digit gambling revenue increases became routine until late 2007, when the trend suddenly and painfully reversed. The latest results, released this week, showed a statewide revenue decline of more than 14% in January, the worst decline in Nevada history. By comparison, in the 1990-1991 recession, gambling revenues increased 2.1% according to Jefferies. The problem in Las Vegas may only get worse. Jefferies estimates Las Vegas is expected to add another 17,000 hotel rooms over the next two years as projects such as City Center, Cosmopolitan and a Planet Hollywood Towers expansion are completed. "I've seen numbers that say all the new rooms will exceed max capacity of planes that could come in and out at McCarran International Airport in Las Vegas. In other words, you'd need a whole new airport to fill the demand of new rooms," said Mr. Aronson. Write to Jeffrey McCracken at jeff.mccracken@wsj.com and Tamara Audi at tammy.audi@wsj.com