MGM Grand Paradise closed in October 2012 on $2 billion in debt that refinances existing facilities, helps to build a new resort on Macau’s Cotai Strip and allows it to start making robust distributions even during construction of that resort. MGM China, the holding company for the Grand Paradise, was founded as a joint venture between US-listed MGM Resorts International and Pansy Ho, daughter of Macau casino pioneer Stanley Ho, and is now 20% listed on the Hong Kong Stock Exchange.

The financing illustrates the continued enthusiasm of lenders in Asia for casino credits, helped by developers’ preference for shorter-dated debt. When MGM China first discussed the five-year financing with lenders, it never sought a sixth year. The developer knew the limits for European and US banks, and these are not normally a problem for casino operators, which usually throw off large amounts of cash for debt service. What it sought – and achieved – was greater flexibility.

The $2 billion equivalent five-year financing for MGM Grand Paradise is split between a $1.45 billion-equivalent revolving credit facility and a $550 million equivalent term loan. The revolver is large for a project financing, but reflects the strength of MGM’s balance sheet at the time. If MGM could have convinced participating lenders to give it a $2 billion revolver, it would have avoided having to close the term loan. But the lenders resisted giving it a larger revolver than $1.45 billion

MGM, though, never really needed a term loan, because it already had about $500 million cash on hand at the time. It wanted to have additional liquidity on hand for when it begins building the first $2.6 billion phase of Cotai and to start making distributions.

A revolver is a flexible and relatively cheap vehicle, because interest expense depends in large part on how much is drawn, while pricing of a term loan frequently increases over time. A sponsor often feels pressure to use the proceeds from a term loan even when the need for the facility temporarily recedes. The pricing of the MGM financing started at 250bp over Hibor and will remain there through the end of the first six months, then ranges between 175bp to 200bp over Hibor depending on MGM China’s leverage ratio.

The financing has some aggressive features, in line with MGM China’s ambitious promises to shareholders. MGM Grand Paradise said on 28 February 2013 that it will make aggressive semi-annual distributions – up to 35% of anticipated consolidated annual profits. It will pay dividends in Hong Kong dollars. MGM China also convinced lenders to accept a less-than-typical structural quirk: a financing without construction covenants.

The main covenants in the deal are financial, and include a leverage maintenance test of 4.5x before the Cotai resort is open, and 4x after that, a minimum interest coverage test of 2.5x, and a restricted payments test of 3.5x leverage. The financing is secured upon both the existing MGM Macau and the new property, and prohibits the borrower from granting additional pari passu liens, except for limited carve-outs. The financing also features a covenant mandating that the borrower keep in compliance with relevant money laundering and bribery laws.

For its lender group, MGM mixed relationship banks and lenders looking to develop their presence in the Macau casino market. Bank of America, Crédit Agricole and JP Morgan, Sumitomo Mitsui Banking Corporation are some of MGM China’s long-standing relationship banks. Banco Nacional Ultramarino (BNU), Bank of China and ICBC also were likely participants in the financing, given their long presence in Macau.

MGM ultimately mandated Bank of America, Bank of China, BNU, ICBC, Crédit Agricole, Deutsche Bank, Royal Bank of Scotland and SMBC. Barclays, BNP Paribas, JP Morgan, Scotiabank and UBS joined during syndication. Banco Comercial de Macau, Morgan Stanley, Tai Fung Bank and Wing Lung Bank were senior managers. The financing was oversubscribed, with most lenders maintaining their hold levels as Project Finance went to press, though a few banks have sold down.

The deal refinances about $920 million in debt that MGM Grand Paradise closed in two previous stages, and on which $539 million was outstanding at the end of September 2012. MGM closed a $220 million project loan in the fourth quarter of 2007, which was an add-on to an earlier $700 million financing that funded construction of the $1.06 billion MGM Grand Macau casino.

Bank of America and HSBC were leads on both earlier financings – Bank of America, as a longstanding player in the US gaming industry, where MGM Resorts International is based. The most recent piece of that six-year financing was split between a $180 million term loan and a $40 million revolver. Besides Bank of America and HSBC, the lead banks on the $700 million finanxing were Bank of China, BNU, BNP, China Construction Bank, RBS and SMBC.

The Macau gaming industry has made several fortunes, and has so far failed to scorch any lenders, though competition is becoming increasingly intense. The Cotai Strip will soon host six resorts, including the MGM and facilities sponsored by Sands, Wynn, Galaxy, Melco and SJM. 

MGM Grand Paradise
STATUS
Closed 29 October 2012
SIZE
$3 billion
SPONSORS
MGM, Pansy Ho
DESCRIPTION
A debt package to refinance of $920 million in existing facilities and to help build the first $2.6 billion phase of the Cotai casino resort in Macau
DEBT
$2 billion-equivalent five-year debt package split between a $1.45 billion-equivalent revolver and a $550 million term loan
LENDERS
Banco Nacional Ultramarino, Bank of China, BNU, ICBC, Crédit Agricole, Deutsche Bank, Royal Bank of Scotland and Sumitomo Mitsui Banking Corporation (lead arrangers), alongside Banco Comercial de Macau, Barclays, BNP Paribas, JP Morgan, Morgan Stanley, Scotiabank, Tai Fung Bank, UBS and Wing Lung Bank
SPONSOR LEGAL ADVISER
Norton Rose and DSL Lawyers (Macau counsel)
LENDER LEGAL ADVISER
Allen & Overy
CAYMAN ISLANDS LAW ADVISER
Walkers