Monday, property developer Dubai World said its subsidiary Infinity World, is suing MGM in the Delaware Chancery Court for allegedly committing a breach of its joint venture agreement and placing the project at risk. Infinity World is a joint venture partner to MGM Mirage (MGM) for the development of the City Center project on the Las Vegas Strip.
Infinity World has requested the Delaware Court to relieve it of any obligations under the agreement after MGM stated in its 10-K filing that, There is substantial doubt about our ability to continue as a going concern.
City Center project is a luxury residential, resort and retail complex being developed by MGM on 67 acres between the Bellagio and Monte Carlo resorts on the Las Vegas Strip. The $8.6 billion project is owned by City Center Holdings LLC, a joint venture equally owned by MGM and Infinity World. Project includes plans for several casinos, hotels, a retail strip and other office and residential buildings. Infinity World contributed $4.3bn to the project and owns 50% of it. The complex has been under construction since 2005 and is scheduled to open in late 2009. Dubai World also owns about 9.5% of MGM Mirage shares.
Las Vegas, Nevada-based MGM, which is struggling under more than $13 billion in debt, in its 10-K SEC filing, also stated that it cannot provide assurance that its business would generate sufficient cash flow from operation. The company also has raised concern about the availability of future borrowings under its senior credit facility. Infinity World has accused MGM of incurring heavy cost overruns on the project.
The lawsuit comes to MGM Mirage at a time when it faces the likelihood of defaulting on loans due within two months. MGM was granted a waiver by its lenders until May 15 to restructure at least $7 billion of the $13.5 billion in long-term debt. According to loan agreements and the waiver, after May 15 the lenders reserve the right to declare MGM to be in default. In case lenders exercise any or all such rights, MGM or City Center may determine to seek relief through a filing under the US Bankruptcy Code.
In the meanwhile, Fitch cut its ratings on MGM Mirage to 'C', an extremely speculative grade, from CCC. The rating agency also warned that a distressed debt exchange of the casino operator's bonds appears imminent or inevitable. In such a case, the bondholders are usually asked to swap existing debt for new debt or equity at less than the bonds' par value. Such a situation is generally counted as a default by rating agencies.
Dubai World indicated that MGM's disclosure that it cannot provide assurance that it will be able to meet its future payment obligations to City Center has left it with no other option but except to act to protect its investment and the future of City Center .
Dubai World blamed MGM of mismanaging the City Center project, with costs significantly over budget despite downsizing certain of the facilities.
In August 2007, MGM, initially, provided an estimate of $7.5 billion to complete City Center. Later on, the estimate was increased by approximately $1.3 billion to $8.8 billion. MGM initially anticipated a financing package of $5 billion but was ultimately able to raise only $1.8 billion.
Dubai World continues to believe that the City Center project has enormous value that will eventually reap tremendous benefits in the long run. Dubai World said it is working with lenders and MGM to ensure the project could still be completed in line with its deadline of late 2009.
MGM Mirage closed Monday's regular trading at $3.11, up $0.06 or 1.97% on a volume of 5.66 million shares on the NYSE.
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