Thursday, September 17, 2009

Marty Up! Ponzi Lives

Several years ago, the Big Show and I coined the abbreviation "MARTY UP!" to indicate it was time to implement the Martingale System. Lately, Vegas has been Martying Up their own balance sheets in classic Ponzi fashion. Last week I noted that Harrah's basically executed the very definition of a Ponzi scheme, when they issued new debt to pay off their old debt. This week MGM did something similar.

MGM had an exchange offer outstanding: they have debt coming due in 2010 ($782MM of 8.5% notes), and they tried to get investors to exchange that debt for new debt due in 2016, yielding 10%. Basically, they offered to pay you a little more, in exchange for you agreeing to wait a little longer to get paid back. There was a slight problem: of the $782MM outstanding 2010 notes, only $21MM had agreed to extend and pretend. That's how Ponzi scheme's fail.

No fear, though - today MGM announced that they were revising the terms of the exchange so that it would only effect roughly $25MM of the 2010 bonds... And in a separate announcement, they revealed a private placement of $350MM of new debt due in 2018. PONZI SUCCESSFUL! Obviously, they will use the proceeds of this placement to pay down existing debt.

There's one more important piece of fine print in MGM's 8k today:
"At March 31, 2009, the Company reviewed its CityCenter investment for impairment. The Company’s discounted cash flow analysis for CityCenter was based on estimated future cash outflows for construction and maintenance expenditures and future cash inflows from operations and residential sales of CityCenter. Based on its analysis, the Company determined that no impairment charge was necessary at March 31, 2009.
The Company expects to conduct an impairment analysis of its investment in CityCenter as of September 30, 2009. The Company believes it is reasonably likely that the outcome of this review may lead to a non-cash impairment charge but cannot reasonably estimate the amount or range of such impairment charge at this time."

You can be sure that MGM will have to recognize an (epic?!?!?) impairment charge on CityCenter when they finally decide to acknowledge the reality of the crap-tastic situation in Las Vegas.

Marty Up! Long Live Ponzi!


disclosure: no position in MGM, but looking for a place to short it, along with LVS

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