Will Kirk Kerkorian's own empire fall?

Last fall, the reclusive billionaire Kirk Kerkorian’s decision to sell his stake in the Ford Motor Co. was widely viewed as just another symptom of Detroit’s long decline. However, it turns out that Kerkorian was giving up on Ford because his own economic empire was under siege.

Kerkorian isn’t going to have to apply for the expanded unemployment benefits being offered by the Obama administration but the core of holdings, MGM Mirage is now under siege.  The company’s shares have lost 50% of their value in a matter of days, MGM’s credit rating has been slashed, major lenders have halted the supply of money for big projects and rumors are circulating the MGM is now on a glide path into bankruptcy court.

“The downgrade reflects MGM’s draw in the context of the company’s strained liquidity position and the continued expected deterioration of Las Vegas operating trends.” Fitch rating service noted after MGM announced that it borrowed the remaining $842 million left from a $4.5 billion senior revolving portion of its $7 billion credit facility.   “Fitch previously noted that it believes that MGM is unlikely to remain in  compliance with its 7.5 times (x) leverage covenant this year, so fully drawing on the revolver increases the likelihood of a near-term covenant breach,” the report noted.

A breached covenant means lenders can call MGM’s outstanding notes and loans, forcing the company into bankruptcy.

Meanwhile, MGM Mirage has also said it is delaying the filing of its 2008 annual report until mid-March.  MGM told the Securities and Exchange Commission it was unable to file the report because it is “assessing its financial position and liquidity needs in light of recent and ongoing economic conditions, which have negatively impacted its operating results.”

Yes, well, we’ve been seeing a lot of that lately, haven’t we.

MGM said it has begun talks with its lenders in order to obtain a waiver for any instances of noncompliance with requirements of its loan agreement. However, it “can’t guarantee” that waivers or amendments can be obtained from key lenders. In fact, it appears one of the key lenders, Deutsche Bank, has dumped its part in a $1.2 billion project in the center of Las Vegas.

In addition, due to the potential of noncompliance with the financial covenants, it is also likely that the company’s auditors could attach to the company’s 2008 annual report a statement questioning its ability to remain a “going concern.”  A similar statement, openly raising the specter that the company could go out of business, was inserted in the annual report released by General Motors, this week.

Of course if MGM does collapse, it’s going to a launch a tidal wave of bad punditry. After all, once upon a time, casinos were considered recession-proof.

But I do hope that some observers pause long enough to remember Kirk Kerkorian’s long infatuation with the car business and suggest that Detroit’s decline wasn’t a one-time event for badly-managed industry. Instead the real lesson is that Detroit was really the canary in the coal mine, a warning that the U.S. had lost its economic bearings and was heading straight for disaster.