(The following statement was released by the rating agency)
Oct 11 - Fitch Ratings has affirmed CityCenter Holdings, LLC's (CityCenter)Issuer Default Rating (IDR) at 'B-', the secured credit facility and the firstlien senior secured notes at 'BB-/RR1', and the second lien secured notes at'B-/RR4' . The Rating Outlook is Stable.
CityCenter's 'B-' IDR reflects:
--Adequate liquidity and a solid free cash flow (FCF) profile;
--Strong asset quality and favorable center location on the Las Vegas Strip;
--The property's meaningful exposure to high-end international play, which hasbeen a major driving factor for the Las Vegas Strip recovery over the past twoyears;
--Fitch's favorable outlook for the Strip, which should benefit from limited newsupply over the next three to five years and steady, yet lackluster, U.S.economic recovery.
CityCenter's IDR is being constrained by the entity's high leverage (9.6 times
as of June 30, 2012) and the elevated business risk associated withoperating a single-site facility and high exposure to high-end baccarat play,which tends to have a volatile win rate.
The business risk concern is partially offset by the meaningful non-gamingcomponents of CityCenter, which provide a degree of diversification. Vdara, anon-gaming hotel, and Crystals, a high-end retail area, contribute 10% and 13%of latest 12-month (LTM) resort operations EBITDA, respectively. Also, Fitchbelieves that CityCenter benefits from being part of MGM Resorts International's(MGM; 'B-' IDR with Positive Outlook) Las Vegas Strip portfolio and loyaltydatabase (M life).
The Stable Outlook reflect that there is enough financial flexibility at 'B-' toabsorb a temporary moderate reversal in the recovery on the Las Vegas Strip.However, CityCenter's high leverage also limits rating upside. Longer term,CityCenter's IDR may migrate towards the mid-to-high end of the 'B' category asthe entity is expected to generate considerable FCF, which could be used todeleverage.
Fitch currently does not link MGM's and CityCenter's IDRs largely because ofMGM's weak financial profile and restrictive debt covenant limit MGM's capacityto support CityCenter. Also, CityCenter and MGM both have high exposure to theStrip and in an event of stressed operating environment both issuers' capacitiesto support one another would likely be diminished. In Fitch's opinion,CityCenter has high strategic value for MGM, which could support increasedrating linkage longer term, but Fitch currently views CityCenter's creditprofile largely on a standalone basis.
Free Cash Flow
Fitch forecasts CityCenter to generate $42 million - $72 million of FCF in 2013,the first full year in which CityCenter may opt not to exercise the pay-in-kind(PIK) option on its 2nd lien notes. The FCF forecast incorporates an EBITDAestimate of $240 million - $260 million, $168 million in interest expense and$20 million - $30 million of maintenance capex. The 2nd lien notes' PIK optionruns through 2016, which can provide up to $80 million in cash flow relief ifneeded.
Fitch expects cash to be retained at the JV level since both the note and loancovenants restrict dividends and the JV's requirement to use its excess cashflow to paydown the term loan was eliminated when CityCenter paid-down the loanusing proceeds from a 1st lien tack-on issuance in February 2012. (In March,CityCenter amended its credit facility, which now consists of a $75 millionundrawn revolver.) CityCenter's notes are trading at a significant premium(around 107) but become callable in January 2014 (first liens at 103.8 and 2ndliens at 105.4).
CityCenter's liquidity is healthy. As of June 30, 2012, available liquidity isapproximately $268 million and consists of:
--$75 million undrawn revolver maturing January 2015;
--$140 million of unrestricted excess cash (net of estimated $27 million of cagecash); and
--$53 million remaining in a capitalized interest account.
Aside from the revolver, the nearest maturity is the 1st lien note with $1.15billion outstanding in January 2016. Fitch projects that CityCenter willaccumulate nearly $500 million in excess cash by year-end 2015.
Covenants are not a major concern as the bonds have no maintenance covenants andthe amended credit facility's minimum EBITDA covenant should be manageable. Thecovenant starts at $185 million in March 31, 2013 and steps up to $250 millionby September 2014 compared to a latest 12 months (LTM) EBITDA level of $194million. Fitch projects that the revolver will remain undrawn therefore risk oftechnical default per the agreement is largely a non-event.
CityCenter's capital structure consists of:
--$75 million revolver, which is pari passu to the first lien notes;
--$1.15 billion in first lien notes maturing January 2016;
--$705 million ($746 million pro forma for July 2012 PIK) in second lien notesdue January 2017; and
--$607 million ($1.15 billion face value) in member loans which Fitch views asequity.
Leverage through the first-lien and second-lien is approximately 5.9x and 9.6x,respectively, as of June 30, 2012. Fitch expects leverage to improve to around5.0x and 7.5x, respectively, by year-end 2013. Leverage may improve furthercloser to the 2016 maturity of the first lien notes as CityCenter may look touse some of the accumulated cash to reduce the amount outstanding prior to andin connection with the refinancing.
Las Vegas Outlook
Fitch believes the fundamental outlook for the Las Vegas Strip remains among thesafest markets in the U.S. for the balance of 2012 and 2013, supported byminimal supply growth for the foreseeable future.
The Las Vegas Strip recovery trajectory slowed materially in second-quarter andforward trends softened, as the shorter-term group/business segment (i.e. in theyear, for the year) weakened. Visitation is up 1.8% year-to-date through August,while gaming revenues are up 2.6% on the Las Vegas Strip.
Fitch currently anticipates visitation and revenue growth in 2013 to be similarto 2012 and expects Aria, CityCenter's gaming component, to grow gaming revenuesat a faster rate than the market given the property's continued ramp up andhigh-end mix.
Recovery Ratings (RR)
The 'BB-/RR1' rating on the first-lien notes and the credit facility reflectsFitch's estimate of 91%-100% recovery in an event of default and results in athree-notch positive differential from the 'B-' IDR.
For the second lien PIK notes, Fitch estimates average recovery prospects in the31%-50% range, which equates to a 'B-/RR4' rating or a no differential from the'B-' IDR.
Fitch calculates CityCenter's value by valuing separate operating components,most notable of which is Aria (valued at 8x of a stressed LTM EBITDA) andCrystals (using a cap rate of 8.5%).
The following could trigger an IDR downgrade to 'CCC':
--FCF approaching or declining below zero; and/or
--2016 first-lien maturity becoming current.
Fitch would consider upgrading CityCenter's IDR to 'B' if:
--Las Vegas Strip fundamentals remain healthy, and
--Leverage through the second-lien notes approaches mid-single digit range(around 5x-6x) in the near-term projection horizon.
(Caryn Trokie, New York Ratings Unit)