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DCR Downgrades Mandalay Resort Group's Ratings

The commercial paper rating of 'D-3' (D-Three) has been withdrawn as the company's program is dormant. The Rating Outlook is Stable. Approximately $1.1 billion of debt securities are affected by this action.

The rating action follows the company's aggressive share repurchase activity during its recently concluded first quarter and DCR's expectation that continued share repurchases are likely.

The Stable Outlook recognizes the current healthy fundamentals of MBG's business as well as its modest capital spending plans during the next few years.

MBG repurchased 11.9 million shares at a cost of $190 million, in excess of free cash flow, during the quarter ended April 30, 2000, which resulted in an increase in debt levels to approximately $3 billion, including operating leases. DCR had previously expected that MBG's debt levels had peaked at yearend and that free cash flow would be utilized primarily for debt reduction during the current fiscal year in order to maintain an investment-grade senior debt rating.

In the recent quarter, MBG reported record operating cash flow of $192 million compared with $148 million in the first quarter last year and $111 million in the previous quarter. All properties reported year-over-year improvement with MBG benefiting in particular from the healthy conditions on the Las Vegas strip.

EBITDA rose 23 percent at Luxor, 22 percent at Excalibur, 13 percent at Monte Carlo and 7 percent at Circus Circus. Mandalay Bay reported a 35 percent EBITDAR improvement to $30.5 million compared with $22.6 million in its initial 59 days in the prior year. Solid EBITDA gains were also experienced in Elgin (60 percent), Tunica (14 percent), Reno (46 percent) and Laughlin (9 percent). In Detroit, MBG's 53.5 percent owned casino reported $20 million of EBITDA in its first full quarter as the property begins to ramp up.

Management is highly focused on shareholder value creation, which it believes is best served through shrinking its balance sheet by virtue of share repurchases and debt reduction. Following the recent share repurchase activity, the board authorized an additional share repurchase program representing 15 percent of current shares outstanding.

MBG's financial policies are to maintain EBITDA/interest between 3-4 times, but also to ensure that its competitors do not have a significant cost of capital advantage. As a result of downgrades that have occurred throughout the sector, MBG is presently comfortable with a more aggressive financial policy, particularly in light of its current healthy operating fundamentals.

SOURCE: Duff & Phelps Credit Rating Co.

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