(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 first lien 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 has been a major driving factor for the Las Vegas Strip recovery over the past two years;
--Fitch's favorable outlook for the Strip, which should benefit from limited new supply 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 with operating 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-gaming components of CityCenter, which provide a degree of diversification. Vdara, a non-gaming hotel, and Crystals, a high-end retail area, contribute 10% and 13% of latest 12-month (LTM) resort operations EBITDA, respectively. Also, Fitch believes that CityCenter benefits from being part of MGM Resorts International's (MGM; 'B-' IDR with Positive Outlook) Las Vegas Strip portfolio and loyalty database (M life).
The Stable Outlook reflect that there is enough financial flexibility at 'B-' to absorb 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 as the entity is expected to generate considerable FCF, which could be used to deleverage.
Fitch currently does not link MGM's and CityCenter's IDRs largely because of MGM's weak financial profile and restrictive debt covenant limit MGM's capacity to support CityCenter. Also, CityCenter and MGM both have high exposure to the Strip and in an event of stressed operating environment both issuers' capacities to support one another would likely be diminished. In Fitch's opinion, CityCenter has high strategic value for MGM, which could support increased rating linkage longer term, but Fitch currently views CityCenter's credit profile 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 EBITDA estimate of $240 million - $260 million, $168 million in interest expense and $20 million - $30 million of maintenance capex. The 2nd lien notes' PIK option runs through 2016, which can provide up to $80 million in cash flow relief if needed.
Fitch expects cash to be retained at the JV level since both the note and loan covenants restrict dividends and the JV's requirement to use its excess cash flow to paydown the term loan was eliminated when CityCenter paid-down the loan using proceeds from a 1st lien tack-on issuance in February 2012. (In March, CityCenter amended its credit facility, which now consists of a $75 million undrawn revolver.) CityCenter's notes are trading at a significant premium (around 107) but become callable in January 2014 (first liens at 103.8 and 2nd liens at 105.4).
CityCenter's liquidity is healthy. As of June 30, 2012, available liquidity is approximately $268 million and consists of:
--$75 million undrawn revolver maturing January 2015;
--$140 million of unrestricted excess cash (net of estimated $27 million of cage cash); and
--$53 million remaining in a capitalized interest account.
Aside from the revolver, the nearest maturity is the 1st lien note with $1.15 billion outstanding in January 2016. Fitch projects that CityCenter will accumulate nearly $500 million in excess cash by year-end 2015.
Covenants are not a major concern as the bonds have no maintenance covenants and the amended credit facility's minimum EBITDA covenant should be manageable. The covenant starts at $185 million in March 31, 2013 and steps up to $250 million by September 2014 compared to a latest 12 months (LTM) EBITDA level of $194 million. Fitch projects that the revolver will remain undrawn therefore risk of technical 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 notes due January 2017; and
--$607 million ($1.15 billion face value) in member loans which Fitch views as equity.
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 around 5.0x and 7.5x, respectively, by year-end 2013. Leverage may improve further closer to the 2016 maturity of the first lien notes as CityCenter may look to use some of the accumulated cash to reduce the amount outstanding prior to and in connection with the refinancing.
Las Vegas Outlook
Fitch believes the fundamental outlook for the Las Vegas Strip remains among the safest markets in the U.S. for the balance of 2012 and 2013, supported by minimal supply growth for the foreseeable future.
The Las Vegas Strip recovery trajectory slowed materially in second-quarter and forward trends softened, as the shorter-term group/business segment (i.e. in the year, 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 similar to 2012 and expects Aria, CityCenter's gaming component, to grow gaming revenues at a faster rate than the market given the property's continued ramp up and high-end mix.
Recovery Ratings (RR)
The 'BB-/RR1' rating on the first-lien notes and the credit facility reflects Fitch's estimate of 91%-100% recovery in an event of default and results in a three-notch positive differential from the 'B-' IDR.
For the second lien PIK notes, Fitch estimates average recovery prospects in the 31%-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) and Crystals (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)