MGM Bankruptcy Prediction

MGM Most Likely Casino Bankruptcy, Poll Says

By Jeanine Poggi

NEW YORK (TheStreet) -- MGM Resorts(MGM_) is the most likely casino stock to file for bankruptcy over the next two years, according to TheStreet readers.

Nearly 45% believe the Las Vegas-based casino operator is still in trouble, compared with just 25% who say Boyd Gaming(BYD_) is the most probable casualty of the sector, followed by Penn National Gaming(PENN_) with 21% of the votes.

Las Vegas Sands(LVS_) and Wynn Resorts (WYNN_) are, not surprisingly, seen as the safest plays according to respondents, with just 7% saying Sands is under any real threat, and a mere 3% betting Wynn would file Ch. 11.

It's worth noting that back in February, TheStreet ran a poll asking if MGM was in any threat of bankruptcy. At the time, investors gave a resounding "no." But apparently over the past six months something has changed. While chatter surrounding a potential MGM bankruptcy have surely waned, it's clearly not out of investors' minds.

Taking a look at the Altman Z-Score, it's easy to see why. The Altman Z-Score, a formula developed by New York University professor Edward Altman in 1968, measures several aspects of a company's financial health to forecast the probability of it going bankrupt. Since its inception, the formula has been 72% accurate in predicting corporate bankruptcies two years prior to the filing.

>>Bankruptcy Watch: 8 Risky Casino Stocks

On a general basis, companies with a Z-Score higher than 3 are considered safe, while those with a score of 1.8 or lower are considered distressed. Anything in between is a gray area. Using I-Metrix, TheStreethas determined that of the eight casino operators with a market cap over $200 million, all have a score below 3, and seven of the eight are residing in the danger zone, with a score lower than 1.8.

While not everyone on this list will actually file for bankruptcy -- in fact it's more likely most will survive than go bust -- it is highly possible that at least one could file Ch. 11 in the next two years.

Investors have determined that one will most likely be MGM. With a Z-Score of -0.13, it ranks as the riskiest of the casino stocks and falls way below the "danger zone."

One of the biggest drivers of this despairingly low Z-Score is the $8.5 billion CityCenter development. As of August, the equity value of the complex has fallen to $2.65 billion from $4.88 billion in October 2009. But equity value doesn't take into account the value of the buildings, which MGM has not disclosed.

MGM also has a significantly smaller investment in bustling Macau, China, than competitors like Las Vegas Sands and Wynn. The Asian market has been a driver of growth for U.S.-based casinos, and while MGM has an initial public offering of its joint venture with Chinese gambling mogul Pansy Ho, there isn't much else in the pipeline.

In comparison, Las Vegas Sands has three casinos in operation in Macau and one in development, while Wynn has two locations and another one in construction.

MGM's CEO Jim Murren told CNBC on Tuesday that the company will sell assets to help pay off its mounting $13 billion in debt. The Borgata in Atlantic City is already up for sale.

Murren also hopes an initial public offering of its Macau assets will give it a hefty cash infusion of up to $500 million. MGM said on Monday that it filed an application in Hong Kong for an offering of its MGM Grand Macau, a joint partnership with Pansy Ho, daughter of Chinese casino mogul Stanley Ho.

Of course, it's important to remember that the Altman Z-Score is not a perfect metric, as it is just a snapshot of the financial health of a company at that exact point in time, ignoring future earnings prospects.

If CityCenter is able to surprise investors and become the powerhouse MGM envisioned, this could significantly improve its Z-Score down the road. Likewise, any expansion in Macau or other Asian markets will surely boost its stability.

-- Written by Jeanine Poggi in New York.