CDS Killed The Casino

Author:
Updated:
Original:

Maybe it is just us, but putting up your Casino to cover your near-default debt, well, that just seems... strange somehow. Sure, it's a great (and nearly all-cash) business that could only please the lenders as security, but a posting Casino as collateral seems, somewhat off. Backwards. "In Bailout Nation, Casino asks you for marker."
Maybe it is that getting in trouble with creditors in the gambling business just has a sinister tone to it. Or that it is hard to compute how one would manage to get in that sort of a fix in the first place, given the fact that the Casino is one of the original "cash cow" businesses. Whatever the case, MGM Mirage has managed to get in exactly that sort of fix.

MGM Mirage, seeking to modify lending terms on its unsecured debt and avoid default as gambling activity withers, is in talks with banks to pledge casinos as loan collateral, a person with knowledge of the discussions said.

Bloomberg points out an interesting twist that will surely get the enemies (and friends) of Credit Default Swaps in a tizzy, namely, that banks who have bought CDS on MGM Mirage's debt might not be particularly incentivized to help MGM out of this pickle.

"That's a mystery element here," Cohen said. "To what degree are the bank lenders holding credit-default swaps so they don't give a damn if MGM goes bankrupt."

Of course, this is true of any over-collateralized lender, but we strongly suspect that this nuance will be a small voice of reason lost among the chaotic cries of "moral hazard!" (Nevermind that this is not a moral hazard problem, the term makes for good ink when you want to say "unfair" but your press secretary has saturated that phrase already).
Don't despair. The Lion may yet roar:

"Talks with our financial partners are ongoing," MGM Mirage said in an e-mailed response to questions. "We're evaluating every possible option and, as we've said before, we will explore all serious and credible possibilities."

MGM Mirage Said to Offer Casinos as Security to Avoid Default [Bloomberg]

Related