S&P: MGM Growth Properties' Proposed $400 Million Senior Notes Rated 'BB-' (Recovery Rating: 3)
Key analytical factors:Our recovery ratings on MGP's senior secured debt and senior unsecured debt remain unchanged at '1' and '3', respectively. Our simulated default scenario contemplates a payment default in 2021, reflecting MGP's inability to refinance its revolving credit facility maturity in 2021 (one year later than MGM Resorts' assumed 2020 default year) because of a major disruption in the debt and equity markets, combined with significant deterioration in tenant MGM Resorts operating results. We assume MGM Resorts' lower cash flows result from prolonged economic weakness and increased competitive pressures, particularly in Las Vegas. In our simulated default scenario, we expect MGM Resorts will continue to make its rent payments, reflecting the priority position of rent payments MGP receives from MGM Resorts. However, because of MGM Resorts' lower cash flow, we assume MGM Resorts would be able to renegotiate and reduce rent payments to MGP. We used an income capitalization approach in our recovery analysis and assume that MGP is reorganized or sold as a going concern. We use a 12.2% distressed blended capitalization rate. We assume MGP's revolving credit facility would be 60% drawn at the time of default. We assume that MGP would be able to cover most of its debt service and other capital requirements despite the lower rent payments by MGM Resorts. As a result, we assume that the revolving facility borrowings were invested in EBITDA generating projects or investments, and that the borrowings generated a return of 8.5% (similar to the cap rate paid for Borgata), and that incremental net operating income (NOI) was about $31 million. We value MGP based on EBITDA of about $470 million at emergence. This reflects a 30%-35% stress to S&P Global Ratings' estimated 2016 EBITDA level of about $680 million. Our assumed emergence EBITDA incorporates base rent from the MGM master lease portfolio, including Borgata, plus our assumed additional NOI from other investments noted above. We subtract additional property costs of 5% of gross recovery value to reflect added costs that MGP may incur as a result of MGM Resorts' being in default. We assume administrative claims total 5% of gross recovery value after property costs, given the two classes of debt in MGP's capital structure. Simulated default assumptionsYear of default: 2021 EBITDA at emergence: $470 millionCapitalization rate: 12.2%Simplified waterfallNet enterprise value (after 5% additional property costs and 5% administrative costs): $3.5 billionSenior secured debt: $2.5 billion--Recovery expectation: 90% to 100%Senior unsecured debt: $1.5 billion--Recovery expectation: 50% to 70% (upper half of the range)All debt amounts include six months of prepetition interest.