Source:  www.business.timesonline.co.uk 

JIM MURREN has heard it all. It started with “there’s no way you’re gonna survive this”, recalled the boss of the biggest casino group in Las Vegas, MGM Mirage. Then it was “well, it’s going to open but it’s going to be a pile of shit because you’re gonna cut corners”. And now they say: “It’s open but can you make money?”

A computer image of the yet-to-be completed City Center
A computer image of the yet-to-be completed City Center

It may be February, with snow on the mountains surrounding Las Vegas, but the temperature and the language in Murren’s office are red hot. He has just done something that will make him — and the British taxpayer — the biggest winners in Sin City. Or the biggest losers.

He has spent $9 billion (£5.9 billion) opening City Center, the world’s largest and most expensive casino complex, in the American town worst affected by the deepest downturn since the Great Depression.

Royal Bank of Scotland and Lloyds, both propped up by the UK taxpayer, have sunk hundreds of millions of pounds into the scheme. They are the second largest lenders after Wall Street.

At 18m sq ft, City Center is a city-within-a-city on the Las Vegas Strip, featuring, when fully complete, four hotels with 6,300 rooms, a giant casino, 2,400 homes, 42 restaurants and bars, four spas and a 500,000 sq ft shopping centre. Nothing, not even the Burj Khalifa in Dubai, the world’s tallest building, screams “boom-to-bust” louder. It was designed by world-class architects who command sky-high fees, including Britain’s Norman Foster. The boutiques — Gucci, Louis Vuitton, Cartier — are the stores nobody wants to shop in any more, even if they can afford to. Murren has also spent $40m on art, including sculptures by Henry Moore and Antony Gormley.

It is tempting to dismiss Murren as a more respectable latter-day Bugsy Siegel — a man who dreamt big and blew a fortune raised by his New York backers building one of Vegas’s first giant casinos, The Flamingo. But Murren is in it much deeper than that. He is not only backed by Wall Street and the City. Sheikh Mohammed bin Rashid al-Maktoum, ruler of Dubai, has sunk $4 billion into the project.

If Murren loses his outsized bet, he is going to have the kind of enemies Siegel could only have dreamt of. And he knows it. “I did not have a single grey hair before I got involved in this. Now look,” he says, tugging his salt-and-pepper locks.

Sadly, the omens for the 48-year-old — and the taxpayer — are not good. City Center, the largest privately funded development in American history, is $1.2 billion over budget. Spending got so out of control that Sheikh Mohammed — yes, Sheikh Mohammed — sued, claiming that Murren was splurging too much money on gold taps and Italian marble. The case was settled out of court.

The project has already nearly gone bust. It was bailed out last year by a consortium of American banks after Murren convinced investors and MGM directors that it was better to keep going than “cut off the arm [City Center] to try to save the patient [MGM Mirage]“.

Thanks to City Center, MGM hasn’t made a profit for two years. The firm’s latest figures, for the final quarter of last year, show overall revenue fell 6% to $1.5 billion. Gambling revenue was down 7%, while room revenue decreased 14%. MGM’s debt is $12 billion. The firm was a profligate borrower during the days of easy credit to finance expansion in Asia and upgrade its Vegas properties. As well as City Center, MGM also owns the MGM Grand, the Bellagio and Mandalay Bay. The firm’s shares have crashed from a high of almost $100 to a low of less than $2. They now stand at $11.

With the slump in the housing market, Murren had to slash the prices of the new homes at City Center by 30% but even so he has taken deposits for only 1,350 of the 2,400 apartments. The shopping centre is half empty and two residential towers have yet to be fitted out. Small wonder the value of the development has been written down by $1.1 billion.

“We’re not out of the woods,” said Murren, with commendable sang-froid. Others use different language. City Center is “an absolute catastrophe,” says America’s best-known developer, Donald Trump. Michael Paladino, an analyst at Fitch Ratings, said it could drag MGM into default.

The problem is the recession has left rooms and casinos across Vegas empty. Visitor numbers were down almost 5% in 2009. Room rates fell almost 25%, more than in any other American city, and gambling revenue is off by 10%. Restaurants are so quiet you can hear the chefs’ tears in the kitchen. The electronic chorus from the one-armed bandits today sounds more like a lament than an invitation to have “slots ’o’ fun”.

Murren acknowledged that the timing of the launch was lousy. It was a mistake to build so many new homes. MGM had hoped to make more than $3 billion from the sale of condominiums but will realise only about $2 billion.

But he said there were green shoots in the desert. Room rates, while as low as $100 a night in five-star properties across Vegas, “will be up this year compared with 2009 and be up more next year”. “We’ve bottomed out now,” he said.

Even with its 6,300 new rooms, he predicted that City Center and other resorts in the MGM stable will be full most of the time by the end of this year. “All we need to fill the rooms is 4% growth in visitor numbers to Vegas this year to 36m-37m people. I think the actual figure will be over 38m.” He claims that Aria hotel, one of four in City Center, “is already generating positive cashflow”.

Murren does have some financial wriggle room. One consequence of the credit crunch is that MGM has put billions of pounds of its own money into City Center. “We have debts of only $1.7 billion in the project. The financial community thinks that City Center is over-leveraged when in fact it is under-leveraged. It is the most overequitised project in the history of commercial development.”

Murren said that towards the end of this year MGM will recapitalise the development. “We will re-do the bank deal and put more leverage on City Center and disperse that capital back to the partners.”

On Friday, MGM announced that lenders had given it two more years to pay back a $5.5 billion portion of its overall $12 billion debt that was to come due in October 2011. The company also expects to reduce its debt burden with an initial public offering in Hong Kong based on its joint-venture casino partnership in Macau. Analysts estimate an IPO could raise between $250m and $500m.

Whatever happens, one thing is certain. Nobody will be so bold — or so dumb — as to build a casino resort on this scale for at least a generation.

“We’re all shell-shocked by what has happened in this town over the past 12 months,” Murren sighed. But then he perked up. “But it’s good for us, right? With limited new supply, if demand grows at even a modest rate over the next 10 years, that’s good for us.”

Looking at the empty Blackjack tables and deserted restaurants, it’s hard to believe. But Murren has to. He’s all in.

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