Wall Street banks face $100m of losses on Las Vegas deal

A group of four banks led by Citigroup are facing a near-$100m loss after selling a portion of a loan backed by two Las Vegas casinos, in a sign that banks are anxious to offload assets hit by the pandemic even at steep discounts.

Citi, Deutsche Bank, Barclays and Société Générale lent $3bn to MGM Growth Properties — owner of the MGM Grand and Mandalay Bay casinos on Las Vegas’s famous strip — in February, shortly after MGM had sold a 49.9 per cent stake in the properties to Blackstone, according to regulatory filings.

The four banks had intended to use the loan to back a $1.9bn deal in the commercial mortgage-backed securities market, but a sharp sell-off triggered by the Covid-19 outbreak scuppered those plans, according to people familiar with the deal. 

Instead, the banks sold the two lowest rated tranches of a revised deal to investors at a steep discount this week.

The triple B-rated slice of debt priced at 83 cents on the dollar while the riskiest, double B-rated tranche fetched just 77 cents, according to the people. Together the tranches amounted to $534m. That equates to a loss for the banks of about $99m on the face value of the debt.

Citi took 40 per cent of the original loan on to its balance sheet, while the other banks each took a 20 per cent share, according to two people with knowledge of the arrangement. 

The banks still have close to $2.5bn of the original loan on their balance sheets and hope to sell the higher-rated tranches of the CMBS deal once markets stabilise and economic conditions improve, said people familiar with the plans.

Lower-rated tranches of CMBS are typically sold at a discount, offset by a premium earned on higher-rated tranches. But investors and people involved in the MGM deal said that the chances of the banks recouping the full amount lost on this week’s sale are slim.

“At this point the loan has been made so the damage has been done,” said one banker involved in the transaction. 

Bankers also noted that the original loan may have been hedged to offset the risk of its value declining, but provided no further details.

Casinos and hotels have been some of the hardest-hit properties underlying CMBS as government orders for people to stay at home have impinged on tourism and travel.

However, investors and rating agencies noted that MGM has ample cash on hand to continue paying its debts even while its properties remain closed due to coronavirus. That contributed to investors’ appetite for the deal. 

Despite the steep discount, the yield on the bonds remained low compared to other debt in the $1.3tn CMBS market. The triple B-rated tranche sold with an additional yield above a benchmark swap rate of 5.3 per cent. That compares to an average spread of 9.7 per cent across triple B bonds at the end of April, according to JPMorgan data.

Citi, Barclays, Deutsche and SocGen declined to comment.

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