C.M.O. 4.22.2010

Credit Market Overview

April 22, 2010

One of the benefits of the latest media frenzy surrounding Goldman Sachs (GS) is that it is providing cover for all of the other poor unfortunates that would be the subject of endless hours of populist scrutiny.

It has already been pointed out that the filing of the civil suit against GS last Friday was perfectly coincident with the release of the SEC Inspector General’s report that SEC examiners concluded four times between 1997 and 2004 that Texas financier R. Allen Stanford’s businesses were fraudulent but each time decided to go no further.  Obviously not the kind of stuff an administration bent on keeping the populist fires burning needs to have garnering headlines.

Another beneficiary of the grinding Goldman is getting is neither a citizen nor resident of the U.S. but dwells in the Middle Kingdom and was instrumental in getting the MGM Macau up and running.  His name is Stanley Ho and both New Jersey and Illinois have recently been providing a truck load of pebbles for MGM’s shoes as they accuse Mr. Ho of having connections with some unsavory individuals and I’m not talking about anyone inside the beltway.

MGM’s problems seem to have started when Chinese officials denied MGM Mirage a gaming license in Macau.  New Jersey’s Division of Gaming Enforcement said in a report to the state’s Casino Control Commission recently that the company then knowingly signed an unfit partner in an attempt to reverse the denial.  “From the beginning of its efforts to enter Macau, MGM pursued partnerships with persons that it knew were associated with those aspects of gaming in Macau most heavily penetrated by organized crime.”

MGM Mirage’s joint venture partner in Macau is not Stanley but actually his daughter Pansy.  Given, however, that a report by a private-investigation firm employed by MGM concluded that the former was “closely linked” to 14K and Sun Yee On, two major Macau triads (organized crime groups) and also had links to Russian organized crime groups and North Korean authorities that the latter “could be susceptible to influence by ‘unsuitable persons’ because of her tight business relationship with her father.  YA THINK?!  The Illinois Gaming Board has informed MGM that is was opening a similar investigation.

On the bright side Mr. Ho has never faced charges of any kind and has disputed any allegation of said connections.  MGM Mirage CEO, Jim Murren, said recently that New Jersey had not submitted any evidence that Ms. Ho “has engaged in any wrong doing of any kind or been accused of any illegal activity”, going on to say, “MGM Mirage structured its business relationship with Pansy Ho to ensure the highest standards of operation and compliance with all applicable gaming laws and to protect against any improper influence.”  Interesting that Mr. Murren’s comments were all focused on Pansy.

Working in MGM’s favor, on the financial side of things Bank of America (BAC), Royal Bank of Scotland (RBS) and JP Morgan Chase (JPM) have agreed to extend a $5.55BN senior bank credit facility that was due in October of 2011 for two more years.  MGM’s CFO, Dan D’Arrigo called the agreement a “milestone” in efforts to improve the company’s balance sheet.

Although the allegations could have wide reaching affects MGM’s CDS is trading at around 800bps and has hugged the 1000bps level since September of last year.  While the CDS might be bouncing along the bottom the stock made a new 52-week high on 4/13 closing at $15.41.  Last night’s close of $15.09 was just off that mark.

Enjoy the week.

Jim Delaney

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