NOTE: Unlike my previous investment memo, this analysis does not provide a comprehensive history or overview of the company. I recommend reviewing CreditSights or another investment memo on the company before reading this analysis.

The memo was written on May 4, 2026.

CREDIT INVESTMENT AND THESIS:

Bausch Health Companies presents a compelling mispriced distressed credit opportunity driven by a fundamental disconnect between market-implied outcomes and underlying asset value.

Consensus is anchored to an overly simplistic “patent cliff” narrative around Xifaxan, extrapolating a rapid revenue collapse and near-zero free cash flow post-2028, ultimately implying forced asset sales and impaired creditor recoveries.

We believe this view materially mischaracterizes both the timing and severity of erosion, while underappreciating

• the durability of the HE franchise,

• the staggered nature of generic entry,

• and the embedded optionality within BHC’s asset base (most notably BLCO and Solta.)

As a result, the market is systematically undervaluing forward cash flow generation and recovery value across the capital structure, creating an attractive asymmetric opportunity, particularly in the 2L and near-dated unsecured bonds, where we see equity-like returns with materially lower default risk.

PRO-FORMA CAPITAL STRUCTURE:

PRO-FORMA MODEL:

INDUSTRY OVERVIEW:

The U.S. specialty pharmaceutical industry is operating in an increasingly challenging policy and competitive landscape. Branded drug manufacturers face a convergence of pricing pressure, loss-of-exclusivity (LOE) risk, and evolving demand dynamics —headwinds that are particularly acute for companies with concentrated portfolios and limited pipeline depth.

The Inflation Reduction Act

The Inflation Reduction Act has introduced a structural shift through Medicare’s Drug Price Negotiation Program, enabling CMS to select high-expenditure small-molecule drugs for price negotiation as early as seven years post-approval (vs 11 years for biologics). This compressed exclusivity window materially alters the risk-adjusted return profile for small-molecule assets and is already driving capital reallocation toward biologics and other complex therapies. (Simply, the capital is moving from small-molecule assets to biologics)

Xifaxan (majority of BHC’s cash flow) has been selected for CMS’s second round of negotiations, with negotiated pricing set to take effect on January 1, 2027—preceding expected generic entry in 2028. This sequencing creates a dual-phase revenue compression event concentrated in Bausch Health’s highest-margin product.

However, this is not BHC’s sole problem. Most branded pharmaceutical companies with key assets approaching LOE between 2026 and 2029 face similar layered risks, including patent expirations, litigation-driven early generic entry, and authorized generic launches. While authorized generics may partially cushion volume erosion, they typically accelerate net revenue decline and margin compression.

The gastrointestinal therapeutics market is becoming more competitive across both branded and generic channels targeting IBS-D and HE, while payors and pharmacy benefit managers are putting price pressure that can accelerate share loss. In contrast, the eye health segment—where Bausch Health participates through its majority stake in Bausch + Lomb—benefits from more durable secular tailwinds, including aging demographics and increased contact lens penetration. However, this segment remains highly competitive across surgical, pharmaceutical, and consumer health categories, limiting margin expansion potential.

COMPANY OVERVIEW:

Bausch Health Companies Inc (NYSE/TSX: BHC), a Canada-incorporated specialty pharmaceutical and medical device company headquartered in Laval, Québec, operates a diversified platform across four segments:

• Salix (gastrointestinal),

• Bausch + Lomb (eye health),

• International, and

• Diversified.

The Company generated approximately $10.3 billion in consolidated revenue, with Bausch + Lomb contributing $5.1 billion, while Salix remains the primary EBITDA driver, (with its flagship product, Xifaxan).

Xifaxan generated approximately $2.2 billion in 2025 revenue (with almost 70% EBITDA margin) and is approved for two core indications:

• irritable bowel syndrome with diarrhea (IBS-D) and

• overt hepatic encephalopathy (OHE or HE)

making Xifaxan the Company’s most critical asset from a credit perspective.

Bausch Health maintains an approximate 88% economic interest in Bausch + Lomb Corporation (NYSE: BLCO), which completed its IPO in May 2022. However, the planned full separation of Bausch + Lomb remains incomplete, contingent on leverage reduction targets, regulatory approvals, and the resolution of ongoing Xifaxan-related litigation—factors that continue to complicate the Company’s capital structure.

For full-year 2025, consolidated adjusted EBITDA attributable to Bausch Health was approximately $3.5 billion, reflecting continued revenue momentum. However, free cash flow declined year-over-year, primarily due to increased working capital requirements and higher interest expense.

Formerly known as Valeant Pharmaceuticals, the Company continues to carry the legacy of its prior acquisition-driven roll-up strategy, which resulted in one of the most highly levered balance sheets in the specialty pharmaceutical sector—a structural overhang that remains central to the credit story.

MANAGEMENT OVERVIEW:

Bausch Health is led by Thomas J. Appio, who assumed the role of CEO in May 2022 which coincided with the Bausch+Lomb IPO and the separation of BHC’s standalone leadership structure. Appio brings over three decades of pharmaceutical industry experience, including 23 years at Schering-Plough across diverse international markets, followed by leadership roles within Bausch + Lomb, including President and Co-Head of B+L International from 2018 through 2021.

His operational background is weighted toward international commercial execution and ophthalmology rather than capital markets or financial restructuring, a profile that has drawn scrutiny from creditors given the complexity of BHC’s balance sheet management challenges.

It seems that CFO is keep changing, which could be a potential red flag.

The average tenure of the broader management team stands at approximately 3.3 years, indicative of the significant organizational disruption that accompanied the post-Valeant restructuring and the B+L spin-off process.

Management’s credibility with credit investors will ultimately hinge on its ability to execute a viable liability management strategy ahead of the Xifaxan LOE cliff, a task that demands both financial engineering and operational discipline that the current leadership team has yet to be fully tested.

MARKET CONSENSUS AND MISPRICING:

Our investment thesis is anchored in the view that the market misinterprets Bausch Health Companies across several key areas:

• The market assumes a single-event revenue cliff following Xifaxan’s loss of exclusivity (LOE) in January 2028, with immediate and simultaneous generic entry driving a +50% decline in Year 1 and an additional +30% decline in Year 2

• As a result, consensus expects post-LOE free cash flow to collapse to near zero

• This perceived cash flow deterioration implies that BHC would be forced into a distressed or fire-sale divestiture of BLCO

• The market assigns overly low valuation multiples to the International, Solta, and Diversified segments, reflecting an overly punitive view of their earnings quality

Our analysis challenges the market’s core assumptions around Xifaxan’s LOE trajectory, the likelihood, timing, and valuation of a BLCO sale, and the valuation of BHC’s underlying segments.

We view the widely assumed revenue cliff and post-LOE free cash flow collapse as second-order consequences of these misinterpretations and not primary drivers of value.

We believe the market undervalues Bausch Health Companies and Xifaxan due to three core misunderstandings:

1. Xifaxan is a one-of-a-kind drug and exhibits unusually high switching costs

2. It targets two distinct diseases with durable, diversified revenue streams, with HE exclusivity extending through October 2029.

3. Bausch retains high-quality, growing segments, particularly Solta, that offer both monetization optionality and durable cash flow generation.

1. Xifaxan LOE Will Not Follow a Standard Generic Erosion Curve

We believe Xifaxan is pharmacologically and commercially different from comparable drugs, resulting in less severe revenue erosion post-LOE.

Xifaxan (rifaximin) is a BCS Class IV drug (low solubility, low permeability), requiring additional human clinical testing beyond standard bioequivalence trials, thus increasing the complexity, cost, and timeline of generic entry.

This dynamic is already observable in the European market. Despite Xifaxan’s exclusivity expiring in mid-2025, there has been no meaningful generic entry. This provides a highly relevant real-world data point: a market with no patent protection, a regulatory framework supportive of generics, and clear commercial incentives, yet still no meaningful generic penetration. The absence of entry reflects the clinical and regulatory complexity of establishing bioequivalence for this molecule. If the European experience is indicative, and it is the only directly comparable post-exclusivity market, Xifaxan’s generic erosion is likely to be slower and less severe than a standard LOE trajectory.

However, in the US, the FDA has accepted bioequivalence study designs from Teva, Sandoz, Sun, and Amneal, positioning these players for potential generic entry. Crucially, these designs didn’t incorporate traditional in vivo (human) studies, calling into question the clinical robustness of equivalence and the ultimate effectiveness of generic substitution.

Switching costs for Xifaxan, particularly in hepatic encephalopathy (HE), are structurally high. The prescribing decision is physician-driven, not patient-driven, and therefore less sensitive to price than typical generic substitution. Physicians are primarily incentivized to minimize clinical and malpractice risk, especially for chronic, high-risk conditions like HE.

As a result, the threshold to switch to a generic is meaningfully higher. This is further reinforced by uncertainty around the clinical robustness of generic equivalents, which reduces physician willingness to substitute away from Xifaxan.

That said, we do expect more meaningful erosion in the IBS-D indication, which accounts for approximately 60% of Xifaxan revenue and is more exposed to conventional generic substitution dynamics.

In fact, there are multiple drugs that treat IBS-D and HE. However, they are less effective than Xifaxan, thus Xifaxan is preferred. For the reasons mentioned, we believe generic substitution will be less effective than the market expects, resulting in less severe revenue erosion.

2. Xifaxan’s Overlooked Indication Split Extended 2029 HE Protection

Xifaxan is often modeled as a single product facing a single LOE event in 2028. That framing is fundamentally incorrect. While Xifaxan is one drug, it treats two different diseases, and it represents two distinct revenue streams: IBS-D and hepatic encephalopathy (HE):

• IBS-D (Irritable Bowel Syndrome with Diarrhea)

  • Treats Travelers Diarrhea

  • Represents approximately 55–60% of Xifaxan sales

  • Short-course treatment (typically ~2 weeks)

  • Primarily outpatient, commercially insured

  • This is the portion exposed to generic competition starting in 2028

• HE (Hepatic Encephalopathy)

  • Manages the symptoms of hepatic encephalopathy (HE).

  • Represents approximately 40–45% of Xifaxan sales

  • Chronic, lifelong therapy (taken daily, indefinitely)

  • Diagnosed and managed by hepatologists

  • 500,000 Americans have HE and 20,000 to 40,000 get hospitalized annually

  • Globally, approximately 60 million people are diagnosed with cirrhosis

  • HE portion is protected until October 2029

The Federal Circuit confirmed in April 2024 that BHC’s HE patents are valid and infringed, and a district court ruling in 2025 prevents the FDA from approving any HE-labeled generics before October 2029. This means meaningful generic competition in HE generics is legally blocked until 2029.

There is also no easy workaround for competitors: current generic approvals, such as Amneal’s, apply only to IBS-D, and expanding into HE would require additional clinical trials and a supplemental regulatory process, which is both time-consuming and uncertain. As a result, generics entering in 2028 cannot directly compete for HE prescriptions.

As mentioned earlier, from a clinical view, substitution is also inherently difficult. Because no HE-labeled generic exists, pharmacists cannot automatically substitute a generic. Any change in treatment requires an active decision by the physician. This is particularly important given the nature of the patient’s condition: HE patients are typically very sick, often with advanced liver disease, and require continuous, long-term therapy.

Key Point: Although IBS-D accounts for most sales, the HE segment is far more valuable from a credit perspective. These patients depend on Xifaxan daily and indefinitely, making this 40–45% of revenue highly recurring, resistant to switching, and protected until 2029.

These dynamics have a clear economic implication for Bausch Health Companies: Xifaxan revenue is likely to be more durable and decline more gradually than the market expects. The HE segment, which accounts for approximately 40–45% of total revenue, remains protected through 2029, ensuring that a meaningful portion of sales persists even after initial generic entry in 2028. Meanwhile, high clinical switching costs and limited automatic substitution slow erosion within the IBS-D segment.

As a result, rather than a sharp revenue cliff, BHC is more likely to experience a staged and gradual decline, preserving a significant portion of its cash flow. Given that Xifaxan is one of the company’s largest and highest-margin products, this durability supports earnings and operating cash flow through the 2026–2028 period, providing BHC with greater flexibility to manage its capital structure and pursue strategic actions.

Importantly, generic competition is also likely to be phased rather than immediate. Under the Hatch-Waxman framework, initial entry is expected to be limited, with a single generic entrant in early 2028, followed by broader competition beginning in the second half of the year. This staggered entry further controls near-term erosion.

Finally, the market’s implied revenue decline appears inconsistent. Xifaxan revenue is split between IBS-D, which loses exclusivity in 2028, and HE, which remains protected until October 2029. For total revenue to decline by ~44–50% in 2028, the IBS-D segment alone would need to fall by approximately 57–60% within a single year, an outcome that appears unlikely given the combination of limited initial competition, clinical complexity, and physician-driven prescribing dynamics.

• In the first half of 2028, there is only one generic competitor. In this situation, generics are usually priced at about 65–70% of the brand, and the original drug can still keep around 25–40% of its volume. This suggests a more moderate decline of about 20–30% in IBS-D, not a sharp collapse.

• Bigger price drops usually happen only when multiple generics enter, which would only happen in the second half of 2028. So most of the pressure comes later, not immediately.

• Also, the HE part of the business is fully protected until late 2029, so a large part of the revenue is not affected at all in 2028.

• Putting this together, revenue decline should be gradual, not sudden. A more realistic estimate for 2028 revenue is around $1.2–1.38 billion, which is higher than what is being assumed. This adds about $30–138 million in extra cash flow for the year.

• Combined with stronger performance in earlier years, this gives the company more financial flexibility, lowers risk, and gives more time before needing to make big decisions like selling assets. There is a risk that Amneal Pharmaceuticals could enter earlier due to litigation, but this would only affect IBS-D and not HE. (And we agree with the market that Amneal Lawsuit will not result in LOE in 2027)

3. BLCO is Undervalued and Current Stock Price Isn’t the Best Measure

We believe BLCO is significantly undervalued, and it understates recovery of the bonds. BLCO is one of the most important assets in BHC’s capital structure because BHC owns approximately 88.7% of BLCO. This means that BLCO’s equity value directly affects how much value is available to BHC creditors. The market is still using a conservative BLCO valuation, but recent Q1 2026 results show that BLCO is growing, improving margins, and raising guidance. Because the bond market has not fully incorporated this improvement, BHC’s bonds remain mispriced.

1. BLCO’s Q1 2026 results were stronger than expected. BLCO’s recent results support a higher valuation because the company is growing revenue, improving profitability, and performing better than consensus expected. In Q1 2026, BLCO reported $1.244 billion of revenue, up 9% year over year. This was also above market expectations of roughly $1.22 billion.

a. Proof Reason 1: Growth was broad-based across BLCO’s business segments. Vision Care revenue increased 8%, Surgical increased 7%, and Pharmaceuticals increased 14%. Important products also grew strongly: MIEBO grew 33%, XIIDRA grew 30%, LUMIFY grew 15%, and contact lenses grew 23%. This shows that BLCO’s growth is not dependent on one isolated product; it is coming from multiple parts of the business.

2. BLCO’s margin improvement is structural, not temporary. BLCO is not only growing revenue; it is also becoming more profitable. This matters because a higher-margin business deserves a higher valuation multiple. In Q1 2026, BLCO reported adjusted EBITDA (excluding acquired IPR&D) of $200 million, up from $126 million in Q1 2025. That represents 59% yoy growth. Its adjusted EBITDA margin expanded to 16.1%, up from 11.1% the prior year, a 500 basis point improvement.

3. Reason 3: BLCO raised guidance, confirming management confidence. BLCO’s Q1 results were strong enough that management raised full-year 2026 guidance less than 75 days after issuing the original guidance. BLCO increased its FY2026 revenue guidance from $5.375–$5.475 billion to $5.420–$5.520 billion, raising the midpoint by approximately $45 million. It also raised adjusted EBITDA excluding acquired IPR&D guidance from $1.000–$1.050 billion to $1.010–$1.060 billion, raising the midpoint by approximately $10 million.

Key Point: BLCO is mispriced because the market continues to apply conservative assumptions despite clear evidence of improving fundamentals. The company is now delivering stronger revenue growth, meaningful margin expansion, and has already raised guidance. This discount was previously justified by concerns around weak growth and margins, but recent results directly contradict those concerns. At the same time, the bond market has not fully reflected this improvement because distressed credit reprices more slowly than equity. Many bondholders are constrained by mandates, ratings limits, or liquidity needs, which delays price adjustment even when underlying asset value improves. As a result, BLCO’s equity value can increase while BHC’s bonds remain priced using outdated assumptions, creating a disconnect between true asset value and current bond pricing.

4. Solta is the Crown Jewel

One of the most persistent market views is that BHC will be forced to sell BLCO, and the remaining business is evaluated at a deeply discounted multiple that reflects an overleveraged, declining company with little to no growth.

This market view ignores that BHC operates three additional segments that collectively generate approximately $2.59 billion of revenue and approximately $986 million of EBITDA at current margins and are entirely independent of Xifaxan’s patent status.

We believe Solta Medical is the most important of these segments from a valuation perspective. We have observed strong demand growth for Fraxel and Thermage across Asia, particularly in South Korea and China. (We personally have tried it as well)

• Solta generated $518 million of FY2025 revenue at approximately 50% EBITDA margins, with revenue growth of more than 20% in recent years. Solta is rapidly growing in South Korea and China.

• For example, the company acquired Shibo Zhenmei (in December 2025) distribution business in China for $87 million to expand its business in China. There is a significant on-going “beauty boom” in South Korea and China where Solta can capture EBITDA growth and multiple expansion.

• Also, the company tried to IPO Solta before. In 2022, BHC withdrew its Solta IPO filing because of the weak IPO market, but the underlying business has continued to grow rapidly. The business is currently valued at approximately 8.0–8.5x EV/EBITDA.

• The global energy-based aesthetic device market is projected to grow at 13 to 14 percent compound annual growth rate through 2033 according to Astute Analytica’s October 2025 industry report, providing a durable secular tailwind that is entirely decoupled from Xifaxan’s commercial trajectory.

• At a 20% CAGR sustained through 2029 (below Solta’s recent run rate) Solta reaches approximately $1.1 billion of revenue and approximately $550 million of EBITDA, worth approximately $4.5 billion at a 8x multiple, or nearly double the current BLCO-adjusted BHC equity market cap. Also, many cosmetic companies that have South Korea and China exposure have been trading at almost 20x. If we give a relatively conservative multiple to Solta of 15x - 20x, that is $8.5bn to $10bn, enough to service most debt.

The argument for 15–20x: The market values Solta at a 8.5x EV/EBITDA, consistent with broad US med-device comps. But Solta is not a broad med-device company, it is a high-growth aesthetic energy-based device business with 50%+ EBITDA margins, 20%+ revenue growth, global brand recognition (Thermage, Fraxel), and expanding recurring consumables revenue.

• The comparable companies, Classys (35% revenue growth, 48-52% EBITDA margin, 18-22x EV/EBITDA) and Hugel (14-15% growth, 45-47% EBITDA margin, 16-18x EV/EBITDA), both trade at 16-22x.

• The correct comparable universe is the Korean high-growth aesthetic peer group, not legacy US device makers. At 17x FY2025 EBITDA ($262mn), Solta is worth ~$4.5bn of enterprise value, more than double the market’s estimate, and represents the largest single source of upside optionality in the BHC sum-of-parts beyond the BLCO sale itself.

• It is also very important to note that the majority of Solta’s growth comes from Korea and China, and potential buyers are likely to be from the region who is more willing to give 10x+ valuation.

RISK AND RETURN ANALYSIS:

Based on our contrarian view, we recommend the following:

Priority 1L ($10.8bn): AVOID the 10% Notes and TLB, and Buy Legacy 1L

• HOLD: 10% Priority 1L Notes 2032 ($102, 9.4% YTW)

  • We believe most are already “priced-in”; the bond has “double-dip” but because we expect par recovery, it is not relevant.

  • upside capped at 3-5pts (105% call vs $102); downside 15-20pts if BLCO sale slips to 2028 or BLCO trades below $12.

  • At $102 you earn 9.4% YTW to take BLCO timing risk (which is not sufficient, especially as BLCO and Solta becomes more critical after LOE, 2028~. Even though maturity is in 2032, the additional return does not suffice additional risk for 4y+)

  • It is most likely that the bond will be paid in full, but we believe the return (at the current rate) is NOT lucrative compared to others

• HOLD: 2030 Term Loan B ($96.5, 10.9% YTW)

  • TLB is strictly better risk/return than the 10% notes (same trigger, 150bps more carry, $3.5pts price upside to par, floating rate, but matures two years earlier, meaning less risk).

  • However, similarly, we believe there are better risk/return in different capital structure. Marginally better than other 1L but still Poor risk/return

• BUY: Legacy 1L 2028s (4.875% at $91.5, 11% at $102)

  • Given their our analysis is much more optimistic than the market (even more optimistic than Credit Sight’s view), we believe it is less likely that the bond will be default before maturity.

  • The bond at the current price offers YTW of 9~10%, which is almost equity return. Given that we believe it is extremely less likely that the bond will default, we believe this is a great opportunity to have equity-like return for BB like default probabilities (especially given that we believe LOE will happen post 2028 with lesser revenue erosion)

  • However, we believe other capital structure offers more attractive risk and return profile.

2L Secured Notes ($352mn, $95, 15.6% YTW): Strong Buy with Good Risk/Return

• BUY: 14% 2L Notes ($94.8, 15.6% YTW)

  • We believe 2L is essentially a high-yield bond treated (by the market) as distressed credit. We expect 14% coupon, with near-certain par recovery, and the only real risk is BLCO fire sale and Solta’s underperformance, which we believe is less likely.

  • However, the unsecured are the better absolute return trade if you have conviction on the thesis. But the 2L makes sense as a lower-volatility complement, particularly for a position where you want credit exposure to BHC without taking additional risk.

Senior Unsecured Notes: Weaker Marginal Yield / Risk

• HOLD (DON’T BUY): 8.5% Sr Unsec 2027 ($99.1, 9.5%)

  • Although we expect full recovery and 9.5% YTW is attractive, it is not as attractive as Legacy 1L 2028 or 2L.

  • We also believe this will expose us to reinvestment risk and high opportunity cost of missing investment in other capital structures.

• BUY: 5.0%, 7.0% Sr Unsec 2028 ($87.7, $83.7, 15.0%, 15.4%)

  • The bond offers more than sufficient return given that they mature in January of 2028, only a single competitor starts generic

  • We are highly optimistic that the bond will be paid in par

• AVOID: 5.0%, 6.25%, 7.25% Sr Unsec 2029 (18.3-18.8%)

  • Although the bond has highly attractive return, we believe 300bps point is not sufficient to take over 2028 Sr Unsec.

  • If our analysis on LOE, Solta, and BLCO is wrong, this will more than likely be impaired. 300bps is not sufficient to take additional risk for another year when LOE and related revenue erosion significantly worsens

• AVOID: 5.25% 2030 + 5.0% 2030, 5.25% Sr Unsec 2031

  • Same reason as above. 2028 and 2L already provides lucrative return of 15%, and we believe there is NO merit in taking additional risk (of impairment) for 300bps.

• We believe the Sharpe ratio for post 2029 senior unsecured is relatively lower compared to the legacy 1L, 2L, and pre-2029 senior unsecured. We still believe that there is higher chance (much higher than market’s assumption) of BHC not going bankrupt. However, that alone does not justify BUY on senior unsecured as there are more attractive investment opportunities (like 1L, 2L, possibly equity), and therefore, we recommend hold on senior unsecured.

Equity: Strong Buy with Optionality

• However, while we acknowledge a non-zero probability of a restructuring scenario, we view bankruptcy risk as materially overstated by the market given BHC’s asset coverage and cash flow durability.

• Our conviction is anchored in the value and monetization potential of Solta, which we believe is significantly mispriced and represents the primary source of equity upside. At ~50% EBITDA margins and sustained 20%+ growth, Solta is structurally more comparable to high-growth Asian aesthetic peers trading at 15–20x EV/EBITDA, implying a standalone valuation of $4.5–$8.5bn versus the market’s implied ~8x multiple. This alone supports a substantial portion of BHC’s enterprise value and provides a credible path to deleveraging without distressed asset sales.

• In parallel, BLCO offers additional optionality, with improving fundamentals and recent guidance revisions supporting a higher equity valuation and incremental recovery for stakeholders. Importantly, both assets are monetizable and largely independent of Xifaxan’s LOE dynamics, creating multiple avenues to address the capital structure. As a result, we believe the market is overly discounting a downside scenario while failing to fully incorporate asset-level value, leaving BHC equity mispriced with asymmetric upside at current levels.

The memo was written on April 6, 2026.

CREDIT INVESTMENT AND THESIS:

MGM Resorts International is a global gaming, entertainment, and hospitality company operating integrated casino resorts across Las Vegas, regional U.S. markets, and Macau, with a growing digital gaming presence through BetMGM and LeoVegas. I recommend holding (not initiating) the 6.50% Senior Notes due 2032 for the following factors:

• Low Default Risk But Insufficient Spread Compensation at Current Levels: MGM has a strong EBITDAR of $4.6B and total liquidity of $3.7B, making default before the 2032 maturity extremely unlikely under any reasonable scenario. MGM also has credit-friendly characteristics of steady EBITDAR (from gaming). However, the bond is currently trading at 233bps spread, below (tighter than) the average BB spread of 250bps, despite being rated B+/B1/BB-. The market is pricing an upgrade, even though FCF metrics (especially after share repurchase) do not support the upgrade yet. At the current spread, the bond offers no meaningful upside but is exposed to a significant downside (repricing at a B spread of 350bps). Therefore, risk-adjusted return is not sufficient.

• Share Buybacks Suppress FCF: MGM has repurchased $9.4B of its own shares from 2021 to 2025, and yet has created no value. From a credit perspective, this is the central constraint: MGM generates $800M-$900M in pre-buyback FCF annually in a probability-weighted scenario, but is expected to spend over $1,000M in share buybacks. FCF/Total Debt after buybacks is only 1-2%, insufficient for a BB upgrade.

• Call Option Caps Upside: Even if MGM executes on its deleveraging plan (although the management clearly stated its priority to continue share buybacks) and gets an upgrade to BB, the bondholders’ upside is structurally capped by the call option. The bond becomes callable at 103.25 beginning April 15, 2027 (two years from today). The bond is already trading at a premium of ~101. If MGM refinances at a tighter spread, the bondholder loses the 6.50% coupon with minimal capital appreciation. Also, there will be a significant reinvestment risk in an environment where MGM refinances the bond.

• Las Vegas Structural Deterioration: Las Vegas, which represents 48% of revenue and is the primary driver of EBITDAR and FCF, has plateaued at around $8.4B in revenue, and it is structural. The key metrics (after adjusting for comp/SSP reallocation) show deterioration: lower table drop growth, lower slot handle growth, declining cash-adjusted occupancy for rooms, declining ADR growth, while comp intensity has risen from 33% to 48% from 2021-2025.

INDUSTRY OVERVIEW:

Casino Resorts: the casino resorts industry operates an integrated model combining gaming, food and beverage, hospitality, and entertainment. The industry is mature, highly regulated, capital-intensive, and cyclical, sensitive to macro conditions and discretionary spending. The industry revenue (in the U.S.) grew at a 2.1% CAGR from 2021-2026, with growth expected to decelerate to ~1.4% CAGR from 2026-2031 as the post-pandemic recovery tailwind exhausts and the industry approaches saturation due to more competition.

1. Gaming revenue is relatively stable and less cyclical, but non-gaming revenue (rooms, F&B, entertainment) is highly macro-sensitive, driven by consumer discretionary spending, employment, and tourism trends/visitation, particularly in Las Vegas and Macau, where visitation is the key driver.

2. High-rollers represent 1-2% of visitors but historically generate 20-30% of gaming revenue, creating disproportionate revenue concentration and making gaming revenue less sensitive to the mass economy.

3. Structural shift toward non-gaming revenue is ongoing across the Las Vegas Strip, increasing exposure to consumer discretionary cycles.

4. Online gaming (iGaming/OSB) is growing with a structural headwind, particularly for regional casinos, where drive-to customers represent the majority, and iGaming provides an at-home substitute.

iGaming/OSB: the iGaming/OSB industry is a high-growth and regulation-driven industry that has expanded rapidly since PASPA’s repeal in 2018, enabling state-level legalization. The industry generated ~$29.7B of revenue in 2026, growing at a 27.8% CAGR from 2021-2026, with growth expected to moderate to ~9% as markets mature. The market remains highly competitive and concentrated among scaled operators (e.g., FanDuel and DraftKings), with profitability dependent on achieving scale and reducing promotional intensity.

1. State legalization expansion and regulatory trajectory: each new state legalization expansion expands TAM. So far, 23 states have legalized OSB and 7 have legalized iGaming, with 20 states remaining.

2. Product and Technology differentiation: broader game libraries and superior technology matter for competition.

3. Market Structure is highly concentrated with C4 > 80% on both iGaming and OSB, dominated by FanDuel and DraftKings. The industry has a structurally high customer acquisition cost and promotional intensity.

COMPANY OVERVIEW:

MGM Resorts International (“MGM”) is a global gaming, entertainment, and hospitality company that owns and operates integrated casino resorts across Las Vegas, regional U.S. markets, and Macau, while expanding its digital gaming presence through BetMGM and LeoVegas. MGM has a diversified portfolio of well-known sites, including Bellagio, Aria, The Cosmopolitan, and MGM Grand, as well as BetMGM (50% stake), the third biggest U.S. online sports betting (OSB) and iGaming operator. The company operates an asset-light model (divested old MGM to OpCo and PropCo, selling all domestic real estate to VICI and leasing it back) to redeploy capital into faster-growing digital gaming (4% of revenue) and share buy-backs while maintaining its Las Vegas Strip flagship (48%) and secularly declining Regional (22%) and recovery in MGM China (25%).

Las Vegas (48.1% of revenue) generates revenues from casino gaming, hotel rooms, food and beverage, entertainment, retail, and others, across nine integrated resorts with 37,000 rooms. Over the past five years, the revenue dynamic has shifted from gaming (33%→24%) to non-gaming (67%→76), making the segment more correlated to consumer discretionary spending and travel demand rather than pure gaming volumes. Las Vegas generated $2,858M in adjusted EBITDAR (34% margin) in 2025. Las Vegas Strip has two main drivers:

• Mass-market visitors: driven by disposable income and employment. Visitation to Las Vegas is critical for Las Vegas casino hotel revenue. Mass-market visitors save up, book a flight, and spend a fixed budget. Trips to Las Vegas are discretionary, and any impact on their wages (disposable income) and employment (unemployment rate) will result in lower visitation.

• High-rollers: a player whose gaming budget exceeds $100,000, represent 1-2% of visitors but historically generated 20-30% of gaming revenue.

• Most of Las Vegas Strip’s growth has been due to an increase in comp intensity (SSP Reallocation). More will be discussed in “Financial Statement Analysis.”

The growth of Las Vegas Strip’s revenue and its FCF is most critical in our analysis.

Regional (21.5% of revenue) generates revenues mostly from casino gaming (73.5%) across seven properties in Michigan, New Jersey, Mississippi, Maryland, Massachusetts, New York, and Ohio. Regional casinos are focused on local and drive-to customers with a high slot mix and a more stable (recurring) demand profile. Regionals generated $1,163M adjusted EBITDAR (30.8% margin) and have been very consistent.

• Higher slot machine mix (77%) relative to Las Vegas (20%), providing more stable hold rates and less high-roller volatility

• Important for cash flow stability, given lower volatility compared to LV and China.

• Revenue growth has been flat to slightly positive (2% 5yr-CAGR), and faces potential cannibalization from iGaming as it offers an at-home substitute over a 1-hour drive to local casinos.

  

MGM China (25.4% of revenue) generates revenues mainly from gaming operations at MGM Macau and MGM Cotai, operating under a gaming concession expiring December 31, 2032. Revenue is overwhelmingly gaming-driven, and gaming recovered sharply from the pandemic with 30% 5yr CAGR. However, Macau has a high gaming tax (35% on GGR), leading to a lower segment EBITDAR margin of 27%. MGM China generated $1,203M adjusted EBITDAR (27% margin).

• MGM China is structurally separated from MGM (the parent)

• MGM China shows fast growth in both revenue and EBITDAR.

• Gaming revenue accounts for 88% of total revenue, and it is very dependent on high-rollers. However, gaming revenue tends to be less cyclical than non-gaming revenue, providing steady cash flow.

  

MGM Digital (3.7% of revenue) is a consolidated online gaming portfolio comprised of LeoVegas and BetMGM. Revenue is generated from iGaming, digital slots and table games, live dealer, and online sports betting (OSB). This segment growth is critical for MGM’s growth narrative. MGM’s growth or expansion narrative is closely tied to MGM Digital.

• The Joint Venture structure limits MGM’s strategic flexibility. MGM (the parent) does not have full discretion.

• BetMGM is the third-largest U.S. iGaming and OSB operator, significantly behind FanDuel and DraftKings.

• The segment’s revenue grew at a 48.8% 4yr CAGR from 2022-2025, but is decelerating as markets mature. MGM Digital generated a negative EBITDAR of approximately ($90M) in 2025, and continues to lose from higher competition and capital expenditure

• MGM Digital is a call option for MGM for online gaming

  

  

MANAGEMENT:

William (Bill) Hornbuckle is the President and CEO of MGM Resorts International. Bill started his career in hospitality at age 18, working as a bartender, attended hospitality school at UNLV, and began his career as a room service attendant and assistant hotel manager at multiple resorts in Las Vegas before joining MGM in 1998. Bill is an almost 40-year gaming industry veteran and a 30-year MGM loyalist. He is very bottom-up, deeply involved in the details of operations, including marketing, designing, strategy, and hospitality. Bill initiated asset-light transformation in 2016 and sold MGM Growth Properties in 2021 for $17.2B. He then initiated an aggressive share buyback program totaling $9.4B, reducing shares outstanding by approximately 47%, which is a significant concern from a credit investor’s perspective. The aggressive share repurchases, while barely improving shareholder value, have significantly leveraged the company. This is very concerning and further discussed in “Key Risks.” Bill’s contract was extended last year to serve until 2028, primarily to oversee MGM’s secondary growth narrative – MGM Osaka.

FINANCIAL STATEMENT ANALYSIS:

(i) Revenue and Profitability

Las Vegas: Las Vegas is the largest segment with 48% of revenue, but has plateaued. Following an exceptional post-COVID recovery that drove 77% growth in 2022 and 5% in 2023, the segment has stalled, growing only 0.2% in 2024 and declining 4.2% in 2025 to $8.4B.

• The deceleration reflects a structural shift in consumer demand (and their sentiment of Las Vegas and MGM) rather than a one-time event.

• The underlying metrics are deteriorating: slower table drop growth and slot handle growth, declining cash-adjusted ADR, while comp intensity has risen from 33% to 48%, meaning MGM is spending more on promotion but is unable to draw traffic.

• As a result, Las Vegas EBITDAR margin has compressed from its peak of 37.4% in 2022 to 33.9% in 2025, driven by higher labor costs, comp escalation, and fading pricing power in rooms. We do not expect a meaningful recovery in the near term. More discussed in “Forecast.”

Regional: Regional is the most stable segment, generating consistent low-single-digit growth. Regionals showed less COVID-driven distortion; revenue declined in 2023 due to property-specific factors before recovering. EBITDAR margin has compressed modestly from 35.9% in 2021 to 30.8% in 2025, reflecting labor inflation.

MGM China: China is the highest-growth segment, recovering sharply from its COVID-era collapse. Revenue fell 44% in 2022 as Macau closed, then rebounded 368% in 2023 with the market reopening, and continued to grow at 27.5% in 2024 and 10.9% in 2025, now generating more revenue than regionals. EBITDAR margin has stabilized around 27%, structurally lower than LV due to higher gaming tax.

MGM Digital: MGM Digital is a fast-growing but also cash-burning segment, growing from 0 in 2021 to $654M in 2025, driven by BetMGM’s NA expansion and acquisition of LeoVegas. Despite strong top-line growth, the segment remains unprofitable, generating EBITDAR of -$90M in 2025. The losses reflect structurally high customer acquisition costs and promotional intensity required to defend its third-place market share against FanDuel, DraftKings, and new entrants.

Overall, the consolidated EBITDAR margin peaked at 28.3% in 2023 following the post-COVID recovery, then compressed thereafter. The compression reflects three factors: Las Vegas slowing down from pricing fatigue and rising costs, MGM Digital’s cash burn, and MGM China’s slower growth after recovery.

Note on Casino Accounting:

Casino operators report gaming on a net basis and non-gaming revenue on a gross basis after comp allocation, which is complimentary rooms, F&B, and entertainment provided to gaming customers. The comp allocation distorts the true economics of each revenue line. For example, when MGM provides a complimentary room to a high-roller, the retail value of the room is recorded as both hotel revenue and contra-revenue for gaming revenue, inflating non-gaming revenue (ADR and Occupancy) and deflating gaming revenue. Therefore, we adjusted comp allocation and calculated Adjusted ADR and Cash Occupancy to reflect the true economic nature.

Warning Sign:

Las Vegas: Showing Early Signs of Pricing Fatigue

• MGM’s Las Vegas segment revenue has plateaued for the past few years, at around $8.8B. The underlying metrics are deteriorating: lower table drop, lower slot handle, declining room cash-occupancy, decreasing cash-ADR, and increasing comp. The post covid recovery that drove the demand from 2021 to 2023 is now exhausted, and the market is seeing weaker demand.

• MGM and the broader Strip made a strategic mistake of raising room rates, expanding resort fees, and re-pricing F&B to levels that broke the Vegas value proposition for the mass-market visitors. When a bottle of water now costs $8 and a resort fee adds $50 a night on top of increased ADR, the visitors will choose different destinations.

• Losing Pricing Power: Cash ADR, which shows the pricing power of casino hotels, is slowing in growth and has gone negative for 2025. At the same time, comp intensity is increasing (33% -> 48%), a clear signal of losing pricing power and the unattractiveness of Las Vegas’s value proposition.

(ii) Cash Flow, Liquidity, and Capital Structure

Capital Structure Analysis:

At first glance, MGM does not appear highly leveraged. Net Debt (only traditional Net Debt, excl. lease) is only $4.17bn (LTV: 30.1%, 1.46x EBITDA), compared to an equity value of $9.38bn. However, this understates the company’s true leverage because real estate is fundamental to its operations, and MGM has a 23-year obligation. MGM is legally obligated for the next 23 years, cannot operate without its properties, nor can it relocate assets. Therefore, its long-term lease obligations are effectively debt.

When the lease obligations are accounted for, Net Debt increases to $29bn (LTV: 76%, 10.17x EBITDA), revealing a much more levered capital structure.

However, using MGM’s reported PV of lease also introduces distortion. MGM’s lease terms are significantly longer than the industry (23 years vs 5-10 years), which meaningfully inflates the PV of lease liabilities relative to peers. More importantly, I believe longer leases, given a casino resort’s unique characteristics, are strategically rational. Casino operators are inherently tied to specific locations and cannot relocate. Therefore, a long-term lease protects the operator from an increase (renegotiation) of lease expense. MGM only has 2% step up every year.

To normalize for comparability, I applied the industry standard approach of applying an 8x multiple to lease expense. On this basis, MGM’s adjusted leverage is lower than the PV approach and is more consistent with benchmarking.

Therefore, we added lease obligations to reflect MGM’s true indebtedness, which makes MGM look much more levered than before.

The analysis and adjustment demonstrate that MGM is not as levered as the market views.

Liquidity Analysis:

Further, MGM has strong liquidity. MGM has $1.41bn unrestricted cash, $2.27bn of undrawn senior secured revolver, totaling $3.68bn in liquidity. In addition, MGM has a nice cushion of $9.4bn in equity value, while the company has $5.4bn in debt and $18bn in operating leases.

KEY RISKS AND MITIGANTS:

The primary risks for MGM are Las Vegas Strip losing attraction and visitation, cannibalization of Regionals from online gaming (iGaming + OSB), a 23-year long-term lease contract, and aggressive share buyback. Non-gaming revenue is cyclical and very dependent on Las Vegas visitation numbers.

1. Las Vegas Losing Pricing Power: as mentioned earlier, the number of en/deplaned air passengers in Las Vegas (a proxy for Las Vegas casino visitation) is slowing down. On top of that, MGM Las Vegas is increasing comp intensity while cash paid occupancy and adjusted ADR are decreasing, signaling that MGM is spending more money to increase traffic, yet people are less willing to visit and play games.

a. Mitigant: our projection adjusted comp intensity to room revenue and calculated adjusted ADR to reflect the true consumer sentiment. Also, our projection includes modest growth for ADR and occupancy for both base and downside cases.

2. Online Gaming Cannibalizing Regionals: Regionals produce mostly gaming revenue and have been stable for decades. Regionals provide stability and steady cash flow. However, online gaming, especially with iGaming licenses in certain states, is partially cannibalizing regionals.

a. Mitigant: our projection (even for base case) is very conservative, assumes increased iGaming cannibalization and slower growth in regionals gaming revenue. Also, BetMGM and MGM Digital partially capture the cannibalized revenue.

3. Long-term Lease Contract: MGM has an obligation of about $25bn under all circumstances, regardless of the performance of the properties for the next 23 years. The lease also includes automatic 2% annual escalators.

a. Mitigant: our projection includes 2% annual escalators and accounts for lease liabilities for leverage calculation. However, long-term lease contracts are not materially disadvantageous for MGM given casino resort’s unique circumstances. Therefore, a 23-year contract actually protects MGM from potential lease cost increases from frequent renegotiation.

4. No Value-Add from Share Buybacks: I believe this is the major, and often overlooked, risk. The company has repurchased $9.4bn of shares over 2021-2025 and has created no value for equity holders, at the expense of creditors.

a. Mitigant: our projection includes modest share buyback for base case, arguing that management will soon realize that buyback is not the answer for maximizing shareholder value, and downside case includes the same aggressive buyback, believing that management will commit the same mistake.

5. MGM Osaka – Unlimited Completion Guarantee and Cost Overrun risk: MGM has committed $2.3B remaining to fund MGM Osaka through 2028. MGM committed an uncapped guarantee to fund completion, meaning if the completion delays or cost overruns, MGM will need to finance much more than expected. If costs escalate, MGM’s cash flow will be severely impacted.

a. Mitigant: we do not have the ability to accurately predict MGM Osaka’s completion details. We believe the cost impact is difficult to quantify and have therefore excluded it from the forecast.

6. MGM China Structural Subordination and Macau Geopolitical Risk: MGM China’s debt structurally subordinates MGM Resorts International’s bondholders. Also, the Macau government holds MGM China’s gaming concession, and the government can terminate it under any circumstances. As of today, the concession contract is scheduled to terminate in 2032.

a. Mitigant: Projecting/Predicting Macau’s government action is beyond our judgement. Therefore, it was not included in both base and downside cases. Also, the government termination is unlikely to occur, and the current gaming concession ends on December 31, 2032, after the recommended bond’s maturity.

FORECAST:

To forecast MGM, we must separate MGM into five distinct segments: Las Vegas Strip Resorts, Regional Operations, MGM China, MGM Digital, and Corporate and Other.

Our scenario analysis is primarily driven by the historical data and industry report on slower and steady growth in Las Vegas Strip Resort, a stable but secularly declining (or flat) regional operator, high-potential MGM China, and fast-growing but cash-burning MGM Digital. Cost assumptions for each segment were based on historical data and expected economies of scale (or worse, if revenue declines, costs as % revenue increases, given that some costs are fixed).

Capital Expenditure of each segment was also driven by historical data, but adjusted given each segment’s strategy and revenue growth.

I believe the key to MGM credit analysis is understanding the management’s willingness to de-lever (i.e., their willingness to stop Share Buybacks and use that cash to de-lever or re-invest in businesses). This is where Base Case and Downside Case differ severely. Base Case will assume a slower rate in share buyback, while downside will assume the same or more aggressive share buyback. More is discussed later.

Base Case:

• Las Vegas – Gaming: the past 5-year CAGR is 5.4%. However, this includes 2021 and 2022, when the revenue recovered from COVID. The table games drop increased 11.2%, and Slot Handle 10.2% 5-yr CAGR. This did not translate into gaming growth because table and slot handle increases were primarily due to an increase in comp allocation. Comp Intensity increased from 32.7% to 47.7%, which increased GGR but resulted in slower growth in net gaming revenue. Therefore, adjusted for the impact, we believe the growth in table games drop and slot handle is somewhere between 2% and 3%, and we believe comp intensity will slow from a peak of 48% to 45% by 2032.

• Las Vegas – Non-Gaming: Las Vegas is shifting its revenue base from gaming to non-gaming. Even after adjusting for comp allocation (i.e., only considering cash revenue), room revenue grew 13.62%, F&B grew 16.6%, and Entertainment grew 9.7%. We believe such rates are unsustainable, as most of the gains reflected the post-pandemic recovery. Therefore, we assume modest 3% Adjusted ADR growth, 3% F&B growth, and 2% Entertainment growth. This is modest compared to historical.

• Las Vegas – EBITDAR Margin: Although we believe Las Vegas will see some recovery in revenue, we believe that will come at the cost of higher comp and related promotion. Therefore, we expect EBITDAR margin to remain stable at 33%-35%, not reaching its peak 2022 rate of 37.4%. Again, this is modest compared to historical.

• Regionals – Gaming and Non-Gaming: We believe there will be little to no growth in Regionals. We gave Table Games 0.0% growth rate, given its past five yr CAGR of 0.1%, and 0.5% for Slot Handle, given a 1.2% five-year CAGR. Our estimation is more modest than the historical one because we believe in possible cannibalization from iGaming, discouraging customers from driving to local casinos. The impact will be bigger on the downside. For non-gaming, we gave a very modest growth rate of 1% for Room and F&B, and 3% for Entertainment, even though they grew 7%, 8%, 10% respectively in the past five years. We believe they were mostly driven by post-pandemic recovery and comp intensity, and therefore, we gave a modest estimation.

• MGM China – Fast Growing: MGM China showed incredible growth in the past five years. MGM China gaming grew 30% in the past five years, with main floor table games drop increasing 28.6% 5-yr CAGR. We believe high growth will continue, but at a much lower rate because the past five years’ growth is mostly from Macau and China recovering post 2022 from the pandemic. It is less likely that such growth will continue. Therefore, we gave a modest 5% CAGR growth instead of 30%.

• MGM Digital – Fast Growing: Online gaming (iGaming + OSB) is one of the fastest-growing industries in the U.S., and MGM Digital has the third-biggest market share, although significantly behind the second-leader DraftKings. We believe MGM Digital will continue to demonstrate fast growth, but at a much slower rate. We believe 8.8% 7-yr CAGR compared to 48.8% 5-yr CAGR as the industry matures and more competition arises.

• Share Buyback: We believe this is critical for our analysis, as MGM has sufficient liquidity and cash flow to de-lever its debt. However, the management has been focused on maximizing shareholder value, although it added no value, and did aggressive share buybacks in the past. Our base case assumption is that the buyback will slow by 22%. This is based on the fact that MGM has slowed down the repurchase at a rate of 18.4%, and MGM Osaka (expected in 2030) creates uncertainty, limiting repurchase.

Base Case Summary:

Downside Case:

• Las Vegas – Gaming: Our downside projection is very conservative. We project that table games drop and slot handle will only grow at 0.9% 7yr-CAGR, assuming Las Vegas visitation remains below prior expectations. To increase the traffic, MGM will increase comp intensity to 48%-49%, almost historically high.

• Las Vegas – Non-Gaming: The room ADR Adjusted will decrease 1% 2026, then 0% in 2027, then modest 1% growth afterwards. This is because gaming will increase comp intensity, which will increase comp occupancy relative to the total occupied rooms, lowering cash occupancy. We also project more modest growth of 2% and 1% growth for F&B and Entertainment, respectively, even though they were the fastest growing in the Las Vegas segment. We believe overall lower visitation and an increase in comp will lower the quality of F&B and Entertainment offered, pressuring overall segment revenue.

• Las Vegas – EBITDAR Margin: Lower growth in Las Vegas will increase Payroll % Revenue to 32%, Cost of Sales to 6.5%, and Other 26.4%, the highest out of the past five years. Also, a comp increase will have some impact on EBITDAR margin as comp allocation still has a marginal cost of delivering the service (whether room, F&B, or entertainment). Therefore, we project that the EBITDAR margin will be around 32%, which would be an all-time low.

• Regionals – Gaming and Non-Gaming: Although Regionals have historically remained stable, we believe online gaming can cannibalize regionals. Many regionals’ customers drive more than an hour to go to a casino, and iGaming allows them to play games at home without having to drive. Therefore, we give -0.5% to -1.0% growth for table games and slot handle, and 0% growth for non-gaming. As a result, payroll % of revenue will increase to 25%-26%, which is an all-time high compared to its peak of 24.8%, and the cost of sales will increase to 5%-5.5%, much higher than the historical 4.5%. As a result, EBITDAR will be compressed to 29.5% to 27.5%, which is almost 3% lower than its all-time lowest EBITDAR margin of 30.7% in 2024.

• MGM China: We believe that MGM China will continue to grow at a much faster rate than Las Vegas and Regionals. However, we give modest 4% growth in the main floor table games drop, and 0% after 2030, assuming that MGM Osaka will cannibalize MGM China’s operation. This is a very modest assumption. As a result, we expect EBITDAR margin to compress significantly from 27.0% in 2025 to approximately 19.9% by 2032.

• MGM Digital: Online gaming is highly competitive. Although MGM and its affiliated online gaming companies have the third-biggest market share, MGM has been struggling to compete with the top two (FanDuel and DraftKings), which have more than 50% of the market. Therefore, our downside projection assumes that MGM Digital will continue to spend heavily to remain competitive without being able to monetize that spending.

• Share Buyback: We believe management may continue its aggressive share buyback program. Management stated that it is still their “priority” to continue share buybacks, so we believe they will maintain approximately $1B in annual share repurchases. Management may also sell underperforming properties and use the proceeds to fund buybacks. They have done this in the past, most notably through the VICI REIT transaction and subsequent property sales.

Downside Case Summary:

Forecast Conclusion:

I believe Base Case is much more likely to happen than the downside case. Therefore, I distribute 80% possibility to the base case, and 20% to the downside case.

COVENANT ANALYSIS:

MGM 6.5% Senior Notes 2032 is covenant-lite as the company has strong going-concern cash flows and steady revenue dynamics.

• Call Option: the bond is callable before April 15, 2027, make-whole at T+50bps, and after April 15, 2027, at 103.250%. (2028: 102.167%, 2029: 101.083%, 2030: 100%)

• Change of Control Put: MGM has a CoC put at 101% of par plus accrued interest. A change of control is defined as anyone acquiring greater than 50% of voting stock or the board changing majority within two years of a proxy contest.

• Cross-default threshold: meaning, if any debt greater than the $200M threshold defaults, the bond automatically defaults as well

The bond is pari-passu with $2.765B of other parent unsecured, subordinated to a $346M secured yen facility and structurally subordinated to $2.49B MGM China debt.

RETURN/RELATIVE VALUE ANALYSIS:

Although MGM is B+/B1/BB- rated, the spread is very tight (almost upper BB spread). The market believes that MGM should be trading near BB to BB+, and that is why the bond is trading at a premium ($101). Although MGM is a high-yield rated bond, it is highly unlikely that it will default until the maturity of the bond (2032). The analysis should focus on whether the management will continue to buy back shares aggressively or not. If the management stops the buybacks, the bond will more likely than not be upgraded to BB. However, if they continue the buybacks at a similar rate, the bond will stay around B.

I believe the most important metric is FCF/Total Debt, as the company generates strong EBITDAR and is decently leveraged.

Although the Bond is trading at a premium, priced at BB, I believe it is less likely that it will be upgraded to BB because of its FCF Yield. Although MGM is less likely to file for bankruptcy and has strong EBITDAR and EBIT (coverage ratio), its leverage ratio and free cash flow generation are concerning, especially after the share repurchase.

Additionally, given that the current spread for BB and B is historically tight, if the spread were to widen to the historical average, it would result in a price change of -13.02%.

The management still believes that it is their “Priority” to continue share repurchase, and therefore, I believe that investing in the MGM 6.50% 2032 does not offer a sufficient risk/return profile. I don’t see MGM getting upgraded to BBB, and it is already trading at BB. There is not much marginal return even if MGM is upgraded to BB, but there is significant downside risk if the bond were to be repriced at B spreads (where it is rated now). The call option structurally caps the upside, while the downside from widening spread (though low probability) is significant. While the company’s credit profile is too strong (strong EBITDAR and consistent FCF) to justify a sell recommendation, the asymmetric risk/return profile, capped upside from the call, and meaningful spread widening risk do not support initiating a position. Therefore, I recommend Hold.

The memo was written on February 26, 2026.

CREDIT INVESTMENT AND THESIS:

Paramount is one of the largest global media conglomerates. I recommend underweighting 4.95% Senior Notes due 2031 for following factors:

• Increasing competition: Paramount+ is competing in a highly competitive market. Any increase in competition and content war will slow DTC’s top line growth and increase DTC’s content spending, significantly crushing the margin. Even in our base case, the company only produces about $7.9 billion over the next five year when the company spends about $14 billion in content annually.

• Secular Declining Revenue Mix: the company’s revenue is comprised of 60% TV Media, 30% DTC, and 10% Theatrical. TV Media is secularly declining industry, and any faster than expected decline in TV Media could significantly damage the company’s ability to invest in its growth, DTC.

• Poor Earnings Quality and FCF Sensitivity to Content Accounting: the management has changed its KPI multiple times over the past five years and is expected to change its segment breakdown for 2026, which is concerning. Also, two factors (amortization % of content cost and ∆ Working Capital / Content Cost) significantly drive FCF projection. If those factors were to return at “growth phase level” (i.e., that is 2021-2025), the company will experience negative cash flow for the next five years, leading to potential downgrade to B.

• BB Spread Priced in But Potential Spread Widening: although the bond is already priced near BB spread, the spread is almost at historically low level. If the bond gets downgraded and BB spread widens to historical average level, it will result in 1yr price return of -2.46%.

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INDUSTRY OVERVIEW:

TV MEDIA - the TV media (cable networks, broadcast, and linear television) is in structural decline as audiences and advertisers shift toward digital and streaming platforms. The industry (advertising) is cyclical and expected to contract modestly over time.

1. Cyclical advertising and structurally declining industry (in affiliates)

2. Political events and Sports events offer “advertising surprises”

STREAMING - the video streaming industry is structurally growing but has entered a more mature phase signaled by slowing subscriber growth, rising competition, increasing consolidation, rising churn rate, and a shift toward profitability. Growth is increasingly driven by pricing actions, advertising tiers, bundling, and international expansion rather than rapid net adds in subscribers. Moderately concentrated market with C4 = 68%:

The demand for streaming has three key drivers:

1. Continued migration from traditional TV to streaming (cord-cutting)

   

   1. Cord-cutting drives net add into subscription

   2. As cord-cutting slows down, streaming revenue growth expected to slow down

   3. Less cyclical than expected

2. Switching based on availability of differentiated and exclusive content

   1. >50% of consumers have canceled and late re-subscribed when new content was released (churn)

   2. 70-80% of consumers say availability of content is the primary factor when subscribing (net add)

3. Expansion of ad-supported, bundling, and flexible pricing models

   1. 31% of consumers use FAST (Free/Ad-Supported Viewing) (net add)

FILMED ENTERTAINMENT - the filmed entertainment (theatrical releases, content licensing, and digital distribution) shows modest long-term growth, but has high volatility driven by box office performance. The industry is very cyclical, and its performance primarily depends on timing of film slates and franchise releases (hit-driven).

COMPANY OVERVIEW:

Paramount Skydance Corp (“Paramount”) is a global media, streaming, and entertainment company that creates and distributes content across traditional television (“TV Media”), digital streaming (“DTC”), and theatrical platforms (“Theatrical”). Paramount has a diversified portfolio of well-known brands as CBS, Paramount Pictures, Nickelodeon, MTV, BET, and Paramount+, as well was one of the largest film and content libraries. The company is focused on leveraging its content libraries and ecosystem to expand its DTC (29% of revenue) while reducing TV Media (61%), which has been secularly declining and maintaining Theatrical (10%).

TV Media (61% of revenue) generate revenues from advertising, affiliate and subscription revenues, and licensing and distribution of content and other rights. TV Media is generating 20+% OIBDA margin and reinvesting its cash flow into more promising Direct-To-Consumer.

• Secularly declining affiliate and subscription fees with declining advertising

• Purposely declining licensing and distribution (-9% CAGR), pulling its content out of third parties and exclusively showing on its Direct-To-Content

Direct-To-Consumer (29% of revenue) is lagging its market leaders (Amazon Prime Video, Netflix, and Disney+) but reflected strong growth over recent years as the company expanded its DTC. Revenue has grown at 23% CAGR since its expansion in 2021, driven by net adds, ARPU expansion, and growth in advertising.

• +10% (5yr CAGR) growth in the total number of SVOD subscribers

• +13% (5yr CAGR) expansion in ARPU ($/month)

The growth of Direct-To-Consumer revenue is most critical in our credit analysis

Theatrical (10% of revenue) shows stable growth with cyclicality primarily driven by hit movies. The segment is expected to remain stable with couple “surprises”:

• Release of Mega-Hit Film

MANAGEMENT:

After the merger of Paramount and Skydance into a Paramount Skydance, David Ellison became chairman and CEO. David Ellison has a proven record of founding and operating Skydance Media for almost 20 years. Ellison repeatedly mentioned his plans to transform Paramount into a technology-driven media company with heavier focus on Direct-To-Consumer and immediately laid off 2,000+ people to support this transformation. Many new C-Suites like Cindy Holland (former Netflix executive) and Jeff Shell (former NBCUniversal CEO) are hired to expedite the transition.

FINANCIAL STATEMENT ANALYSIS:

i) Revenue and Profitability:

Paramount is strategically shifting its revenue base. It is lowering TV Media, a secularly declining industry, and increasing Direct-To-Media, a faster growing industry, to give overall growth to the company.

TV Media

• Secular declining industry with revenue growth of -5.7% CAGR, declining faster than the cable industry in the U.S. that had -4.3% CAGR, mainly due to significant decrease in licensing from removing its content from third-party and adding to Paramount+ and related streaming services

• Declining margin with lower advertising deals from lower subscription base and less licensing to third-party

Direct-To-Consumer

• High growth is driven by increase in number subscribers for Paramount+ (19.2% CAGR) and ARPU (11.7%). DTC revenue (20.7%) grew much faster than overall streaming industry (5.8%). Paramount+ is in growth phase, while others are maturing

• Margin increasing (high fixed cost structure with scaling revenue). Most of content cost is fixed, and fast top line growth can absorb its cost (e.g., Content Cost % DTC Revenue dropped 71.3% -> 52.5% as top line growth accelerated)

Filmed Entertainment

• Modest growth with occasional hit-driven earnings volatility

Overall EBITDA margin has been decreasing from 2021 – 2023 as the company lowered its high margin TV Media business and increased high content spending needed Direct-To-Media. However, DTC is fast growing and begins to extract higher margin as it approaches later phase in growth cycle. The expansion in EBITDA margin is primarily driven by lower SG&A from restructuring and lower content spending as business enters later growth stage as shown by margin expansion in 2024 - 2025.

Concerning Quality of Earnings

1. EBITDA margin is mainly driven by content accounting (i.e., amortization)

2. Low cash conversion

3. KPI (definition of subscriber) continues to change (e.g., Global subscriber -> Paramount+ Subscriber -> Paramount+ Subscriber Excluding Free Trial)

ii) Cash Flow, Liquidity, and Capital Structure

The company has about $3.39 billion maturing in next five years with $3.27 billion in cash and cash equivalents and $3.50 billion in unused credit revolver (which decreases to $3.44 billion 2027 and matures in 2028, which is also subjected to max leverage of 4.5x). Paramount has sufficient liquidity.

There are about $28 billion on and off-balance sheet obligations. However, most of off-balance sheet commitments (programming and talent commitments of about $25 billion) can be pushed off, which, however, could potentially slow the revenue growth. And the company also $1.9 billion in letters of credit related to obligations.

However, major concern is its cash flow. Even in our base case, the company generates $8 billion in free cash flow over the next five years, which is only 60% of annual content-related spending. Also, there is little potential to lower CAPEX or change in working capital (which is content spending) as the industry is currently in a content war. Increase in content cost or slow down of DTC’s top line growth will lower margin from less fixed content cost abortion.

Further, Paramount has more than enough cushion of $12.9 billion comprised of equity and junior subordinated debt.

KEY RISKS AND MITIGANTS:

The primary risks for Paramount are increasing content spending, deceleration of Direct-To-Media growth, increase in amortization of content spending (content impairment), and secular decline and cyclicality in TV Media and advertising.

1. Increasing Content Spending: the management’s medium-term goal is to increase topline growth of DTC, which requires heavier content spending. Free cash flow is primarily driven by content spending, and increase in content spending will result in negative cash flow

   1. Mitigant: our projection includes content spending % per segment revenue, amortization % of content spending, and change in WC (content inventory) % of content spending to account for different scenarios

2. Deacceleration of Direct-To-Media Growth: although DTC has been growing at 20.7 CAGR for the past five years, the competition in streaming is increasing, which could potentially deaccelerate DTC top line growth

   1. Mitigant: our projection (even for base case) is very conservative given increase in competition and slower projected growth for overall streaming industry

3. Increase in Amortization of Content Spending: bad investment in content leads to high amortization of content spending. If management continues to make bad investment, it could materially impact both cash flow and balance sheet

   1. Mitigant: our projection for base case baked in average amortization rate % content spending, and our downside baked in historically worse amortization rate % content spending

4. Secular Decline and Cyclicity in TV Media and Advertising: although the company is less dependent on TV Media than before, it still accounts for majority of revenue. Faster than expected decline in TV Media could potentially harm the company’s ability to invest in DTC.

   1. Mitigant: our projection is very conservative, and downside case includes faster than industry average decline, which is less likely to happen given CBS and its related broadcast’s extensive franchise and penetration

5. Fail to Restructure: Paramount has been restructuring for past three years and is expected to continue restructuring post Skydance merger. Failure to restructure will lower margin.

   1. Mitigant: in both base and downside case, we did not add back restructuring charges (related to severance and exit cost) as we believe Paramount will continue to restructure its TV Media and exit many of related lease contracts.

6. Warner Bros. Acquisition: if Paramount acquires Warner Bros., it will significantly affect its leverage ratio.

   1. We believe it is beyond the scope of the analysis and expertise, so did not include in any of the scenario.

FORECAST:

Although company uses OIBDA and is shown in the model, our EBITDA forecast and margin is primarily driven by Content Cost growth, Amortization % of Content Cost, and SG&A rather than OIBDA margin. OIBDA and margin is shown for reference (not used for EBITDA calculation).

Our scenario analysis is primarily driven the industry trend of # of cable TV subscription in the U.S. (shown in page 2), as we have identified it having r2 = 0.94 with revenue growth in streaming in the U.S. We have used such industry trend as a proxy for both TV Media and Direct-To-Consumer and adjusted their relative performance against the industry trend.

Using historical data, we assumed fixed portion of SG&A $ 3,000 million and ran a solver to come up with beta for each business segment. Forecasted SG&A = Fixed SG&A + Previous SG&A * Beta of Each Business * (1 + Business Segment Growth)

Content Cost % of Revenue was assumed based on historical level and trend.

Base Case:

• TV Media – Advertising: assume historical secular decline rate (-4%) when # of cable TV subscription in the U.S. decreased by -2.3%. The # of cable TV subscription in the U.S. is expected to decrease at a much lower rate, and thus giving -4% is conservative. Also, assumed political impact volatility (+3%) for Mid-term election in 2026 and Presidential election in 2028 based on historical trend.

• TV Media – Affiliate and Subscription: assume identical growth with # of cable TV subscription in the U.S., and ARPU growth of 2% (matching inflation)

• TV Media – License: assume expedited decline (-7%) to pull more content from third parties and move it to Paramount +

• Direct-To-Consumer – # of Subscriber: assumed 1.3x inverse growth of # of cable TV subscription in the U.S. Cord-cutting has been the major driver in growth of subscriber, and Paramount+ is in growth phase compared to its competitors.

• Direct-To-Consumer – ARPU: assumed Paramount+ will enter mid-tier phase (i.e., not industry leader but maturing) by 2030.

• Direct-To-Consumer: based on assumptions, DTC will grow at 5yr CAGR of 6.2%, much slower than past 5yr CAGR of 20.7%, but still above the industry CAGR of 4.8% because it is in growth phase.

• Direct-To-Consumer: content spending / segment revenue will continue to decrease and stabilize around 52%

• Assumed Amortization of Content Cost 92% (historically 92~93%)

Assumed ∆ Working Capital (Content Inventory) of 0.97 reflecting recent trend

Downside Case:

• TV Media – Advertising: assume decline rate at a historically level. # of cable TV subscription is expected to decrease at a much lower rate (-1.6% compared to -5.7% CAGR for the past 5 years), and thus, this is aggressive assumption of losing pricing power on top of faster cord-cutting

• TV Media – Affiliate and Subscription: assume 10% faster decline compared to the decline in # of cable TV subscription in the U.S., and ARPU growth of 1% (lower than inflation signaling further loss of pricing power). This is aggressive given CBS and related broadcast, and cable has 98% penetration in the U.S.

• TV Media – License: assume expedited decline (-7%) to pull more content from third parties and move it to Paramount +. However, expected to have one more labor union. In 2024, Licensing dropped by 22.6% due to labor strike, and it is more than likely to happen again.

• Direct-To-Consumer – # of Subscriber: assumed 1.0x inverse growth of # of cable TV subscription in the U.S. Cord. This is aggressive given Paramount+ is relatively new and still in growth phase.

• Direct-To-Consumer – ARPU: assumed Paramount+ will enter mid-tier phase much faster by 2028 from rising competition.

• Direct-To-Consumer: based on assumptions, DTC will grow to a 5yr CAGR of 4.0%, much slower than past 5yr CAGR of 20.7% and the industry CAGR of 4.8%. Again, this is aggressive given Paramount’s growth compared to its competitors who are maturing.

• Direct-To-Consumer: competition intensifies and content spending / segment revenue breaks downward trend and increases and stabilizes around 65%

• Assumed Amortization of Content Cost 94% (historically 92~93%)

• Assumed ∆ Working Capital (Content Inventory) of 1.02 reflecting need to spend more on content from higher amortization and increase in competition (2021-23 level)

• Theatrical: labor union strike (-4% similar to 2023 labor strike, content cost % of revenue increases 52% -> 56%) and content cost % revenue base increase 52% -> 53% to account for increase in revenue related to labor strike

Major Concern: EBITDA is hugely inflated by content accounting, and FCF is extremely sensitive to content related expenditure. ∆ Working Capital which is amount of capital spent on content significantly affects FCF projection. Year 2021-23, ∆ Working Capital / Content Cost is about 1.03. Year 2023-25, ∆ Working Capital / Content Cost is about 0.965. Although, it is less likely to hit 1.03 when Paramount+ was just starting to get attention, it is likely to be near 1.00 from increasing competition from content war.

RETURN / RELATIVE VALUE ANALYSIS:

Although Paramount is still an investment grade bond, its bond is already priced at BB spread. Given the company’s content accounting and inflation of EBITDA, the analysis should be focused on FCF/Total Debt, and FCF is most likely trigger credit rating movement.

Given that Paramount is already priced at BB, and its expected value of FCF/Total Debt (70% probability of base, and 30% probability of downside) of BB’s ratio, I believe it is more likely than not to get downgraded to BB. Therefore, I recommend underweight.

Additionally, given that current spread for BB is historically low, if the spread were to widen to historical average, it will result in price change of -2.46%.

Although the management in 25 4Q shareholders letter said, “Our capital allocation priorities remain: … Manage our balance sheet to regain and then maintain investment grade credit metrics,” it will require cutting content spending, which would decelerate DTC growth, which is their priority. Therefore, it is less likely to happen.

Thank you for reading. Please feel free to email me or leave a comment if you have any thoughts or differing perspectives.