The Noose Tightens

Three major gaming companies scramble to avoid bankruptcy

Several major Las Vegas gaming companies are facing imminent bankruptcy as money tightens and results fade. At press time, Harrah’s Entertainment, MGM Mirage and Station Casinos were all dealing with the probability they would not be able to meet their debt payments within the next month, with bankruptcy looming for each.

A number of announcements from gaming giant MGM Mirage has many speculating the company is on the brink of filing for Chapter 11 bankruptcy protection.

In late February, the company tapped into its remaining credit on a $4.5 billion line. Last month, the company announced it would delay filing its annual report until it can assess its financial position and liquidity needs, although it noted it is still in compliance with all of its financial covenants.

“To ensure a thorough and up-to-date discussion of its financial position and liquidity needs, MGM Mirage expects to include additional information about its liquidity and financial position in its Form 10-K, including a detailed discussion of the impact of the matters described above,” the company said in an SEC filing.

The moves suggest to observers that the company is doing anything it can to come up with cash. Tapping into the remaining credit suggested the company was readying for a Chapter 11 filing, while the delayed report gives the company more time to come up with money, possibly by selling another property. The filing also said the company is looking at new agreements or waivers with its lenders.

“If MGM Mirage is unable to negotiate such a waiver or amendment, a majority of the lenders under the senior credit facility could accelerate repayment of borrowings… cross defaults could be triggered,” the company’s SEC report stated.

In a response to Bloomberg News in March, the company reiterated that it was continuing to search for answers.

“Talks with our financial partners are ongoing,” MGM Mirage said. “We’re evaluating every possible option and, as we’ve said before, we will explore all serious and credible possibilities.”

MGM has $1.3 billion in bonds coming due in 2009 and an additional $1.2 billion due in 2010. The company also has a $7 billion bank loan due in 2011, along with $532 million in bond maturities. Defaults on any or all of these items would be reflected in a “going concern” notification by the SEC.

“It’s unfortunate that the company has so many near-term maturities at a time when earnings are so weak and the credit markets have seized up,” Peggy Holloway, vice president and senior credit officer at Moody’s, told the Las Vegas Sun.

There is some doubt whether lenders are willing to negotiate with the company right now.

“Many lenders are not being flexible with gaming operators,” Macquarie Securities gaming analyst Joel Simkins told investors.

The biggest drain for the company has been construction of the $11.2 billion project CityCenter, scheduled to open in part later this year. The company has already sold half of its interest in the project along with 10 percent of its stock, to Dubai World, to fund the project.

MGM recently announced that it would scale back the Harmon tower to avoid rising costs and also because the condo component of the tower was not looking like a strong seller in the current market.

Now, there is some speculation that both MGM Mirage and Dubai World might be willing to sell all or part of CityCenter.

“They could sell a hotel tower or a residential hotel tower to a hotelier,” said Deutsche Bank gaming analyst Bill Lerner.

One thing that looks like it is not going to happen is a merger of CityCenter with the neighboring Cosmopolitan. MGM Mirage was unable to reach a deal with Deutsche Bank to finance the remaining $1.2 billion needed to finish CityCenter. The plan was for Deutsche Bank to provide the funding and add Cosmopolitan to CityCenter in exchange for an equity stake.

In March, speculation arose that the company might be shopping around some or all of its properties, including the Bellagio, to raise more money for CityCenter and to repay debts.

But the company’s ace-in-the-hole may be majority owner Kirk Kerkorian. The 91-year-old investor is an acknowledged genius at making money for his companies. Some of the options being considered include selling properties, turning one or more over to bondholders, or making a deal with a third party who would then pay off bondholders.

MGM has been holding out for a good price, however.

“Among the possibilities would be another asset sale but it would have to be at the right price and the right terms,” MGM Mirage said in the statement.

The company sold Treasure Island Casino Resort to Phil Ruffin for $775 million in December, about a 7 multiple.

Station Sanctions

Another Las Vegas casino company had dual problems: fighting off a low-ball acquisition bid and dealing with a possible bankruptcy filing.

In a response to an offer to buy part of the company from Boyd Gaming, Station Casinos rejected the effort in March, saying that it isn’t for sale at this time.

Station had received a bid from Boyd to buy six of the company’s 18 properties-Green Valley Ranch, Aliante Station, Texas Station, the Wild Wild West and the two Fiesta properties in Las Vegas and Henderson-for $950 million. Aliante Station alone, which opened in November, cost more than $600 million.

The company balked at revealing confidential information to a current competitor, and also was concerned with getting regulatory approval for the purchase.

“In light of the foregoing, and for other valid considerations, our board has concluded that it is in the best interests of the company and our stakeholders to proceed with the current restructuring plan,” wrote Frank Fertitta III, chairman, president and chief executive officer, in a letter to Boyd Gaming Chairman Bill Boyd. “Should circumstances change, we will contact you.”

Analysts generally agreed that Station had to reject the offer at this time because of the possible damage to the company should any sale not be consummated.

Boyd Gaming, meanwhile, reiterated its interest in those properties, saying its offer was more accretive to bondholders than any deal that is being offered by Station.

Prior to rejecting the Boyd offer, Station Casinos announced that it had reached a “forbearance” agreement with its bondholders, that gives it another month to negotiate with them on a possible bankruptcy or restructuring. The agreement will expire on April 15.

Station has been struggling with almost $9 billion in debt accumulated during a private equity buyout that included Colony Capital, which owns 75 percent of the company, and the Fertitta family, which owns the remaining 25 percent.


Harrah’s Hassles

Meanwhile, Harrah’s Entertainment announced a plan that would exchange $2.8 billion in bonds for new notes that would mature later and carry a higher interest rate. The plan would give the company more time to craft a plan to manage its mounting debt and the payment structure.  

In December, Harrah’s was successful in refinancing some debt. The deal exchanged shorter-term bonds for longer-term ones that reduced the company’s debt load by about $1 billion. The company has reportedly been negotiating with several other lenders hoping to further reduce debt and stretch out the payment periods.

Harrah’s carries over $30 billion in debt due to an acquisition by private equity firms Apollo Management and Texas Pacific Group. The purchase was finalized just as the economy was slowing.

The federal stimulus bill recently passed by Congress and signed by President Barack Obama allows companies to refinance their debt and delay paying taxes on the forgiven debt, which was previously recorded immediately as income. Harrah’s had lobbied strongly for the bill.

Moody’s bond rating service last month revealed that Harrah’s Entertainment may not have enough cash to cover $700 million in debt payments due over the next two years. While Harrah’s declined to comment on the speculation, Moody’s said Harrah’s may be able to meet only the interest payments, causing the service to downgrade several classes of bonds due to a “high probability of default” because of declining business in the company’s strongholds, Las Vegas and Atlantic City. The downgrade was made prior to the announcement of the restructured debt offering.

Unlike MGM Mirage, Harrah’s has not sold any properties, but has delayed a hotel expansion planned at flagship Caesars Palace and halted construction on the Margaritaville casino in Biloxi, in addition to taking other cost-cutting measures including layoffs.

Roger Gros
Roger Gros is publisher of Global Gaming Business, the industry's leading gaming trade publication, and all its related publications. Prior to joining Global Gaming Business, Gros was president of Inlet Communications, an independent consulting firm. He was vice president of Casino Journal Publishing Group from 1984-2000, and held virtually every editorial title during his tenure. Gros was editor of Casino Journal, the National Gaming Summary and the Atlantic City Insider, and was the founding editor of Casino Player magazine. He was a co-founder of the American Gaming Summit and the Southern Gaming Summit conferences and trade shows. He is the author of the best-selling book, How to Win at Casino Gambling (Carlton Books, 1995), now in its fourth edition. Gros was named "Businessman of the Year" for 1998 by the Greater Atlantic City Chamber of Commerce, and received the Lifetime Achievement Award from the American Gaming Association in 2012.

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