Fitch Ratings has maintained the Rating Watch Positive (RWP) on the ratings of
The RWP reflects the pending acquisition of MGP by
Key Rating Drivers
'BBB-' IDR Expected Post-RWP: Fitch will resolve the RWP by upgrading MGP's IDR and all of its unsecured debt to 'BBB-' around the time of the acquisition closing, which is expected to occur sometime during second quarter 2022. Fitch expects pro forma VICI will reduce net leverage to 5.5x within 24 months of the transaction closing from an estimated pro forma 5.7x at closing. VICI has meaningfully reduced the risk of closing the transaction by having issued all previously contemplated equity financing. The level of equity proceeds should allow for leverage to decrease to levels appropriate for a 'BBB-'-rated
Fitch sees minimal risk to VICI closing its acquisition of MGP given the equity issuance and few remaining closing conditions (e.g. state gaming regulatory approvals). There are no antitrust concerns that Fitch is aware. In the event of capital market access volatility, VICI could temporarily fund the
Fitch could also resolve the RWP prior to the acquisition closing if all regulatory approvals are received and Fitch views the execution risk of completing the financings via long-term unsecured debt to be low. While Fitch assumes pro forma VICI will be a fully unsecured investment-grade bond issuer, some execution risk exists what will be a sizable inaugural investment-grade issuance amid current volatility in the debt capital markets.
Strategically Sound Merger: Fitch views the merger to be strategically sound in that it alleviates some considerations that were previously restraining the two companies' standalone credit profiles such as tenant and asset diversification. The combination should also improve pro forma VICI's relative access to the capital markets and has limited integration risk given the triple-net leased nature of the portfolios.
Improved Capital Markets Access: Fitch expects the combined company will be one of the largest REITs in terms of enterprise value, EBITDA generation, and outstanding unsecured debt which should enhance the company's credit profile via improved capital access and pricing. Larger REITs are usually more important banking customers by virtue of their size. They are often able to negotiate lower credit facility fees as a result.
Greater Financial Flexibility: The combined company's portfolio will be fully unencumbered following the repayment of the secured debt at VICI and once MGP's existing senior secured revolver is terminated at transaction closing, assuming the bridge facility is not utilized. Pro forma, VICI will have significantly more financially flexibility given the sizeable pool of unencumbered assets, which includes a number of assets in
Historically, gaming REIT's contingent liquidity in the form of mortgage debt or asset sales is not as robust as more traditional CRE property types, such as apartments, office, industrial and retail properties. Casinos are a specialty property type that appeals to a smaller, but growing, universe of institutional real estate investors and lenders.
Some gaming companies have accessed debt via public bonds that were secured by specific assets in a time of stress. There are also gaming assets in some CMBS transactions, but Fitch views the through-the-cycle availability of capital from this avenue as less reliable than secured mortgages from balance sheet lenders, including life insurance companies, and to a lesser extent, banks.
Positively, non-traditional owners have increasingly been purchasing
Tenant Concentration to Improve from Merger: The combined company's credit profile will benefit from more tenant diversification than each standalone profile.
Strong Cash Flow Stability: MGP generates 100% of its rental revenue under a master lease with
Parent Subsidiary Linkage: Fitch rates the IDRs of the parent REIT and subsidiary operating partnership on a consolidated basis, using the weak parent/strong subsidiary approach under its Parent and Subsidiary Linkage Criteria (PSL Criteria). Fitch believes open access and control factors are strong, based on the entities operating as a single enterprise with strong legal and operational ties.
Fitch views MGP on a standalone basis relative to parent
Fitch also believes
Derivation Summary
MGP's main peers are gaming REITs including
Key Assumptions
Annual master lease rent of
VICI assumes MGP's existing debt.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Diversification of the tenant base;
An improvement in MGP's liquidity through moving towards a more unsecured capital structure and greater staggering of the maturity schedule;
A financial policy with a net leverage target of less than 5.0x may offset the lack of progress with respect to the above sensitivities;
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Net leverage sustaining above 5.5x. Fitch has tolerance for leverage to exceed 5.5x for larger acquisitions provided MGP deleverages below 5.5x within 12 months-24 months;
Fitch will update the combine company's rating sensitivities upon resolution of the RWP and there is greater clarity on the pro forma capital structure.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
MGP's standalone liquidity and liability management characteristics relative to investment-grade
Issuer Profile
Summary of Financial Adjustments
Fitch proportionally consolidates the BREIT JV's debt and equity into MGP's leverage metrics.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
(C) 2022 Electronic News Publishing, source