According to S&P, MGM Japan Casino Spend Could Be $2.5B

January 20, 2023 Japan Earnings & Filings

S&P Global Ratings estimates that MGM Resorts International will contribute $2 billion to $2.5 billion in capital to the much awaited casino-resort project in Osaka, Japan.

The ratings agency stated that MGM’s ownership of the project is not expected to surpass 50%, and that the most likely breakdown is 40% of the project owned by MGM, 40% by its partner Orix, and 20% by local investors. That supports the gaming company’s position that it won’t control a majority in the Japan venue.

According to S&P, “MGM’s equity contributions could be $2 billion to $2.5 billion based on the estimated $10 billion development cost and MGM’s expectation that the project could be funded at 55% debt to equity. MGM believes its equity contribution could be spread over several years, perhaps 2024-2026.”

However, as S&P noted, Osaka could pay long-term dividends for MGM and strengthen the operator’s geographic footprint. The risk to the Bellagio operator is that it could take several years after the initial financial contribution for the Osaka integrated resort to deliver cash flow, meaning MGM likely won’t reap immediate profits.

MGM’s Outlook for Japan and Other Markets
Japan might be advantageous for MGM at a time when investors are demanding that businesses in all industries maintain cash or use it wisely. To begin with, the Osaka consortium has not yet received a formal license; this may occur later this year. Thus, MGM probably won’t make significant investments in Japan until the end of 2023 or the following year.

According to the schedule in place and the possibility that Japan won’t provide a license until 2023, S&P continued, “We do not expect major spending to start before late 2023 or 2024.” The project’s completion is probably going to take several years. In the event that the MGM-Orix partnership is granted a license, MGM plans to open the resort in the second half of this decade.

The research company singled out New York as the other jurisdiction where MGM would be required to make significant short- to medium-term investments. It is commonly believed that Yonkers’ slots-only Empire City will be awarded one of the three licenses for downstate casinos. A minimum of $500 million must be pledged by the chosen companies for the gaming project and an equal amount for a license fee.

The $500 million licensing fee would need to be paid by MGM this year, but the most of the expenses would be incurred in 2024 and 2025. According to S&P, MGM predicts the expansion of its Empire City Casino will cost $2 billion to $2.2 billion, including the license fee.

MGM Credit Grade
S&P assigns MGM a junk grade of “B+.” The research company increased the threshold for a lease-adjusted downgrading at a “B+” rating from 6.5x to 7.5x.

Furthermore, we anticipate the company to keep a solid level of liquidity, including cash and revolver availability, of at least $3 billion. The company considers that this offers an adequate buffer to withstand any volatility brought on by its U.S. fixed lease obligations.

MGM had one of the healthiest balance sheets in the sector at the end of the third quarter because to its $6 billion in liquidity.