Las Vegas Project Weighs Bankruptcy

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COMMERCIAL REAL ESTATE
MARCH 27, 2009
Las Vegas Project Weighs Bankruptcy
Woes at Massive City Center Project, MGM Mirage's Centerpiece on the Strip, Rattle Casino Industry
By JEFFREY MCCRACKEN

And Tamara AudiCity Center, the $8.6 billion Las Vegas development owned by MGM Mirage and DubaiWorld, is preparing for a potential bankruptcy filing that could bring the massive project to a halt, according to people familiar with the situation.

MGM Mirage and investment partner Dubai World appear unlikely to make a $220 million payment due Friday on City Center -- a massive resort and casino project under construction on 67 acres. City Center has hired Dewey & LeBoeuf to prepare itself for a possible bankruptcy filing, and the firm's Martin Bienenstock, a noted bankruptcy attorney, is handling the work, according to people familiar with matter. The law firm of Weil, Gotshal & Manges LLP is working for MGM Mirage on a range of legal issues, according to these people.

A filing could come this weekend, depending on talks among MGM Mirage, its lenders and Dubai World, these people said. There is a possibility that any filing for court-protection could be averted if the talks lead to an agreement.

Dubai World, a conglomerate owned by the government of Dubai, has sued MGM Mirage for breach of contract and blamed it for cost overruns. It also signaled it won't provide its half of Friday's payment. MGM Mirage, meanwhile, is struggling to persuade its reluctant lenders to allow it to solely fund the project. While talks between MGM Mirage and Dubai World were ongoing Thursday night, there "may be no choice" but for City Center to file bankruptcy "if Dubai World doesn't fund," said a person close to MGM Mirage.

The casino company faces a cash crunch as it tries to meet obligations on more than $13 billion in debt. The company narrowly averted defaulting on loans last week and warned that it could default by mid-May.

City Center's troubles could spill out across Las Vegas. The project is a stark example of how excesses spawned during a lengthy gambling boom are coming back to haunt the casino industry. The project is so large that thousands of workers depend on it for jobs. At the same time, it has the rest of the city's casino industry on edge. If it gets built, it would add thousands of high-end hotel rooms that would cannibalize business from the city's gambling tables and hotels.

Missing Friday's payment would start the clock ticking on City Center's future. Work could grind to a halt within days, idling 8,500 construction jobs, said a person familiar with the talks between MGM Mirage and Dubai World. A delayed opening would also risk the jobs of 12,000 workers who are to staff the complex.

A shutdown of City Center "would be devastating to the southern Nevada economy," said Steve Ross, secretary-treasurer of the Southern Nevada Building and Construction Trades Council, which represents 22,000 construction workers.

Las Vegas, a city known for its elaborate multibillion-dollar resorts, is already reeling. Echelon, a $4.8 billion resort project on the Las Vegas Strip, was shuttered last year after its parent, Boyd Gaming Corp., and partner Morgans Hotel Group struggled to finance the project. A Las Vegas Sands Corp. condo tower sits unfinished after the casino operator decided to concentrate on finishing other projects. Several projects were canceled before work even started.

Las Vegas has suffered as tourism revenue has declined for more than a year. Unemployment hovers near 10%, and hotel-room occupancy rates have fallen to below 90% -- unusual for a town used to operating at near capacity.

City Center's over-the-top extravagance was conceived in a very different economic climate. When the project was unveiled in 2004, Las Vegas was at the height of a luxury-driven tourism boom. Gourmet restaurants were over-booked, room rates were skyrocketing and pricey shows were sold out. City Center was envisioned as the crown jewel.

MGM Mirage, controlled by billionaire investor Kirk Kerkorian, saw City Center as the next step in the evolution of both the company and Las Vegas.

The project, with two sleek condo towers, a 4,000-room resort casino, two smaller luxury hotels, a monorail, $40 million in public art and its own fire station, was envisioned as a "city within a city." MGM Mirage executives saw it as nothing less than a reinvention of Las Vegas.

Shortly after the project was launched, MGM Mirage Chairman and Chief Executive Jim Murren said, "City Center represents what we feel is a significant new direction for our city and our company."

Even under bankruptcy-court protection, construction could continue or be restarted once the two sides agree on how to fund the project. Neither company is likely to walk away. MGM Mirage has $1 billion in cash invested in the project, in addition to the land contribution. Dubai World has $4.3 billion invested.

While Las Vegas is worried about the impact on employment of a City Center delay, there is sentiment in the casino industry that any delay at City Center could help other casinos -- including those owned by MGM Mirage -- keep from losing even more visitors.

It is not clear what impact a City Center Chapter 11 filing would have on MGM Mirage's other finances.

MGM Mirage's lenders have become concerned enough about the situation that they have hired the law firm of Mayer Brown LLP as bankruptcy counsel, according to people familiar with the matter.

Bank of America and Deutsche Bank are the agent banks for MGM Mirage, said these people. MGM Mirage's lenders will not let the casino giant make the City Center payment Friday unless Dubai World makes its payment, according to people familiar with the matter.

MGM Mirage earnings are projected by Wall Street analysts to tumble to $1.2 billion to $1.6 billion this year, meaning to be in line with loan covenants it needs to reduce its debt to between $9 billion and $12 billion.

Write to Jeffrey McCracken at jeff.mccracken@wsj.com