Boyd looks a better bet than MGM, says Citi

In its latest high yield research, Citi recommends buying protection on MGM Mirage against going long smaller casino operator Boyd Gaming. The analysts point out that despite MGM’s success in dealing with its immediate liquidity problems by raising $2.5 billion in debt and equity in May, the company still has $5.6 billion of debt maturing in 2011. If it survives, the company’s senior lenders will need to roll some of that debt, and these amendments could hurt unsecured recoveries even more.

Citi reckons the rally in MGM’s credit default swap spreads following the capital raising, to 32.5 points up front, is overdone. Spreads do not reflect the fact that most of the company’s better quality assets will now be pledged towards new secured debt.

Boyd, which is trading at 31 points up front in the credit default swaps market, also faces a big task to refinance its $1.9 billion revolver due in May 2012. But Citi thinks this should be achievable. With leverage of 6.1 times compared to MGM’s 7.4, Boyd Gaming is less leveraged than MGM Mirgae. Generous revolver covenants and the company’s defensive presence in “drive-up” markets in Louisiana and Chicago are also positive for unsecured creditors, notes the report.