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Rating Action:

MOODY'S REVISES MANDALAY RESORT GROUP'S OUTLOOK TO STABLE FROM NEGATIVE; EXISTING RATINGS CONFIRMED

27 Jun 2003
MOODY'S REVISES MANDALAY RESORT GROUP'S OUTLOOK TO STABLE FROM NEGATIVE; EXISTING RATINGS CONFIRMED

New York, June 27, 2003 -- Moody's Investors Service revised the ratings outlook of Mandalay Resort Group to stable from negative, and confirmed the company's existing ratings. Additionally, Moody's assigned a Ba2 rating to Mandalay's $400 million floating rate convertible senior debentures due 2033. The $400 million senior notes are senior unsecured obligations and rank equal in right of payment to Mandalay's existing and future unsecured debt. Proceeds from the note offering were used to repay debt outstanding under the company's $1 billion revolving credit facility.

The change in ratings outlook to stable is based on the strong opening of Mandalay's new 1.8 million square foot convention facility, positive advanced booking trends, the addition of a new hotel tower at Mandalay Bay later this year, and expected lower capital expenditure requirements in fiscal 2005 (ending January 31, 2005). On a combined basis, Moody's expects these factors will improve Mandalay's free cash flow and leverage profile over the next two to three years to a level more consistent with the company's Ba1 senior implied rating.

The quarter ended April 30, 2003 is the first full quarter that the convention center has been open (opened January 6, 2003). The convention center has helped to significantly improve room rates at Mandalay Bay and Luxor, and to a lesser extent, at Excalibur. On a combined basis, these properties contribute approximately 50% of property-level EBITDA. While Mandalay continues to invest heavily, the addition of a new hotel tower at Mandalay Bay later this year is expected to have a further positive impact on revenue per available room (RevPar) and mid-week rates. One of the primary concerns with respect to assigning a negative ratings outlook in December 2001 had been the possibility of a slower than expected ramp-up of the convention facility given the September 11 terrorist attacks and an already slowing economy.

The stable ratings outlook also takes into account Moody's expectation that Mandalay's aggressive financial policy will continue, and that leverage, already considered high for the current rating category, will not improve in fiscal 2004 primarily because of significant capital expenditure activity during the year and weakness at the company's non-Las Vegas properties. Debt/EBITDA is currently at about 5.0 times (x). The stable ratings outlook does, however, anticipate that Mandalay will begin to generate positive cash flow after interest, taxes, working capital, capital expenditures, and cash dividends in fiscal 2005, and that debt/EBITDA will be at or near 4.5x by the end of fiscal 2006.

Mandalay has generated positive cash flow after interest, taxes, working capital, and capital expenditures in fiscal 2002 ($201 mil.), fiscal 2003 ($50 mil.), and the first quarter of fiscal 2004 ($56 mil.). However, combined share repurchase activity for those same periods totaled about $500 million. As a result, debt/EBITDA rose from 4.1x in fiscal 2002 to 5.0x for the latest 12-month period ended April 30, 2003. For the full fiscal year 2004, Moody's estimates that cash flow after interest, taxes, working capital, capital expenditures, cash dividends and share repurchases will be slightly negative, primarily because of significant capital spending (about $350 million) and $100 million of share repurchase activity related to the settlement of an equity forward contract earlier this year. However, Moody's expects both lower capital expenditure levels and improved EBITDA following the completion of the new hotel tower this year. As a result, free cash flow should improve with some portion being applied towards absolute debt reduction. Ratings could be negatively impacted to the extent share repurchase activity going forward limits Mandalay's ability to achieve Moody's leverage and free cash flow expectations. Mandalay currently has authorization to repurchase an additional 10 million shares, and recently instituted a quarterly stock dividend. Moody's believes that the new dividend will likely replace some level of share repurchase activity going forward.

The ratings confirmation considers the strong operating performance of the company's flagship property (Mandalay Bay), the gradual improvement of the Las Vegas gaming market, and the longer-term opportunity associated with the development of a permanent casino facility in Detroit, Michigan. However, like other destination resorts, Mandalay's ratings remain vulnerable to softness in the economy and travel trends.

New rating assigned:

- $400 million floating rate convertible senior debentures due 2033 assigned Ba2.

Existing ratings confirmed:

- Senior unsecured debentures and notes at Ba2;

- Senior subordinated debentures and notes at Ba3;

- Senior implied rating at Ba1;

- Senior unsecured issuer rating at Ba2;

- Multiple seniority shelf: senior secured at (P)Baa3, senior unsecured at (P)Ba2; senior subordinated at (P)Ba3, and subordinated at (P)B1;

- Commercial paper at Not Prime; and

- Circus Finance I and II: guaranteed trust preferred shelf at (P)Ba3.

Mandalay Resort Group, headquartered in Las Vegas, Nevada, owns and operates 11 casino properties in Nevada, has a 50% interest in two other Nevada properties, a hotel/casino in Tunica, Mississippi, a 50.5% interest in a casino in downtown Detroit, Michigan, and a 50% interest in a riverboat in Elgin, Illinois.

New York
Tom Marshella
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Keith Foley
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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