Rolling “Craps” in Sin City

2

 Anyone who pays any attention at all to real estate knows that Las Vegas welcome_to_vegashas been absolutely hammered by the real estate downturn. At or near the top in foreclosures, prices down to pre-boom levels, new home building has ground to a halt. The local economy is reeling with unemployment over 10%, tourism down sharply, major casino properties in bankruptcy or teetering on the brink.

However Las Vegas did have an ace in the hole. There were several very large construction projects that supplied construction and related jobs to the local economy. When these resort properties started coming online in late 2009 there would be thousands of jobs created in the properties and with the companies that supplied various supporting services. The local spin-doctors pointed to these projects and boldly stated that these properties ensured that the recovery of the local economy would be swift and robust.

What Could Go Wrong?
                                                                                                      
The credit crunch has had a devastating effect on the local economy. Many planned projects have been put on hold or scrapped altogether because they can’t obtain the necessary financing. Last August a $4.8 billion project, Echelon Place, was mothballed because they couldn’t obtain the additional financing needed even though they had already completed half of the project (article). At the time they halted construction Boyd Gaming said that the project would resume within a year. That doesn’t seem likely and the half-finished project is collecting dust.

So Echelon Place bit the dust, we still most expensive private construction project in the history of the world to fall back on. Or did we? MGM Mirage is building City Centercitycenter_2, a collection of six high-rise towers containing hotels, hi-rise condos and casinos with an initial price tag of $9.2 billion (since scaled back to $8.7 billion). It an effort to avoid the credit problems that faced other projects, MGM Mirage partnered with Dubai World, the cash-rich investment arm of the Dubai emirate. It seemed like a good idea at the time.

Not So Fast 
                                                                                                                                  
Dubai world was looking to restructure its economy since their oil reserves had almost been exhausted. Massive building was taking place in Dubai making it a top travel destination. Partnering with MGM Mirage on City Center seemed like a wise move. In 2007 Dubai spent almost $6 Billion to purchase 50% of the City Center project along with 9.5% of the outstanding shares of MGM Mirage.

However a funny thing happened on the way to prosperity. At the time the deal was struck MGM Mirage shares were valued at $80. On Friday, March 27th the stock closed at $2.85, a drop of more than 96% from the price Dubai paid. Needless to say, Dubai is not at all pleased. Nevertheless, they were stuck with the City Center deal. Or were they?

The souring of the economy and the cash drain of City Center has left MGM Mirage teetering at the edge of bankruptcy. Local prognosticators were speculating on when, not if, they would file for bankruptcy protection. They avoided it at least temporarily by selling off one of their properties, Treasure Island, for $775 million. It looked like they had improved their balance sheet enough to keep City Center going.

Then Dubai dropped the other shoe. Facing economic troubles of their own, they sued MGM Mirage for breach of contract and mismanagement of the City Center project and refused to make their portion of a $200 million payment that was due. It looked as if the project might be forced to shut down, idling 8,500 construction workers and adding to the area’s economic woes.

A Brief Reprieve            
                                                                                                            
MGM Mirage was able to come up with the $200 million needed to keep the project going. However it may prove to be nothing more than a brief respite. The company needs to come up with a strategy to reorganize its $13.5 billion in debt if it hopes to avoid bankruptcy in the very near future. With 85% of the City Center project’s budget already spent they can ill afford to shut it down. An entire city is holding its breath to see how this one plays out.                                                                                                                                                       
                                   
Man, I really like Vegas. – Elvis Presley
 

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