A consortium of banks shopping a commercial mortgage-backed security (CMBS) issued by the owners of The Cosmopolitan Las Vegas are attempting to make the terms more of the $3 billion in debt more attractive to lure investors.
Bank of America Securities, Citigroup, Goldman Sachs, JPMorgan Chase and Morgan Stanley are the banks behind the transaction, which is believed to be the largest in the CMBS space this year. A combination of the deal’s size, increasing market volatility and interest rate tightening by the Federal Reserve are reportedly compelling the banks to boost the issue’s terms.
Unidentified sources with knowledge of the bond sale told Bloomberg spreads on several tranches of the debt came in higher than expected when parts of the issue were sold on Thursday.
Spreads on the securities, which are backed by the hotel’s commercial real estate, flexed up by more than 20 basis points between official guidance on May 20 on May 20 and today’s launch across all tranches, except for the A and B,” reports the financial news agency.
It’s estimated spreads on the C tranche soared 25 basis points on Thursday, meaning the overall increase from May 13 is a full 1%.
The $5.6 billion sale of the Cosmopolitan wrapped up on May 17 with MGM Resorts International (NYSE:MGM) paying $1.6 billion to Blackstone (NYSE:BX) for the operating rights to the Strip venue.
A group comprised of the Cherng Family Trust, Stonepeak Partners, and Blackstone Real Estate Income Trust (BREIT) paid $4 billion for the integrated resort’s property assets. Those are the groups behind the aforementioned bond sale.
BREIT and Stonepeak marketed the debt earlier this month, but Cherng Family Trust wasn’t part of that effort, reports Bloomberg.
The CMBS issue is backed by the Cosmopolitan’s real estate, meaning that in the event of default, MGM likely wouldn’t be affected because the operator’s rent obligations would be transferred to new a property owner.
MGM entered a 30-year lease agreement with that consortium at an initial annual rate of $200 million. That rises 2% per year over the first 15 years. After that, the yearly increase is 2% or whatever the rise is by the Consumer Price Index (CPI), capped at 3%. After the initial 30-year term, MGM has three 10-year renewal options.
Ratings Agency Chatter
Last week, Moody’s Investors Service placed an investment-grade rating on $2.1 billion of the CMBS, but the ratings agency also offered up words of caution.
It highlighted the fact that Cosmopolitan’s revenue stream can be volatile because it derives more than half its sales from casino gaming and food beverage. However, that percentage isn’t uncommon for MGM properties.
In 2021, MGM venues around the world generated $1.39 billion in food and beverage sales and $1.69 billion in room revenue with gaming contributing $5.36 billion, according to Statista.
For the 12-month period ending March 31, 2022, Cosmopolitan generated earnings before interest, taxes, depreciation, amortization, and restructuring or rent costs (EBITDAR) of $416 million on net revenue of $1.1 billion, indicating its margins are impressive among large-scale casino-hotels.
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