MGM Resorts (MGM) made big leveraged bets on China and Vegas through extensive expansion into Macau and the construction of the City Center complex. However, with slowdowns in both China and the spending habits of visitors to Las Vegas, MGM may be setting itself for a huge fold into possible insolvency and bankruptcy. Due to MGM's cash flow risk and the risk of a further economic downturn, I am short MGM and am closely watching its cash flow situation for potential bankruptcy.
The red flag that stood out to me about MGM is its weakening ability to cover its interest obligations.
With a debt-to-equity ratio at a stratospheric 2.27, MGM is overloaded with debt along with increasingly climbing interest expenses. MGM's current annualized interest expense is $1.1 billion dollars which is far higher than its debt level in the 2008 economic downturn. On a per-share basis, this translates to $2.33 on an annual basis. MGM's Q1 free cash flow is -$231 million, and can possibly deteriorate further on economic weakness.
Even assuming that cash stays marginally positive over the next three years, MGM still is a bankruptcy risk. With $2.33 per share in interest expense and only $3.34 of cash reserves per share, MGM only has 1.44 years' worth of interest payments in cash until it cannot pay back debt obligations. Even with the highly leveraged gaming industry, this figure is weak; competitors such as Las Vegas Sands and Wynn have 15.83 and 24.59 cash/interest payment ratios respectively.
In addition to cash flow problems, economic factors are working against MGM and the gaming industry. A recent release of weak earnings from Las Vegas Sands (LVS) confirm the slowdown in gambling spending in both Singapore and Macau. Stateside, things are not much better. According to the Nevada Gaming Council, Vegas spending was down 18% in May 2012 (most recent numbers published).
Unless MGM sells of assets to deleverage or earnings turn around significantly in Macau and Las Vegas, the firms has serious risks of bankruptcy within the next two years. I recommend shorting MGM, but if evidence appears of a turnaround in the US and Asian economies I will hedge with a long position on Las Vegas Sands (LVS).