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August 29, 2014

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Bankruptcy attorney expects more bad gaming news

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With banks tightening their belts and consumers tightening their wallets, it's a good time to be Frank Merola.

As a bankruptcy attorney specializing in the casino business, Merola – who today joined the restructuring team at investment bank Jefferies & Co. – has been involved in just about every major Chapter 11 case in gaming for the last 15 years.

And he's a gaming insider who grew up in Las Vegas, where his father served as a floor supervisor, pit boss and casino manager at several casinos including the Sahara, Aladdin and Riviera.

Which makes him somewhat of an expert in downward business cycles. While it's unclear whether this one is the worst, it's certainly the worst in the modern casino era, Merola said. Casinos, including those on the Las Vegas Strip, are facing increased competition and are more dependent upon nongaming sources of revenue like restaurants, shows and hotel rooms that are more cyclical than gambling revenue.

More importantly, casino companies are more highly leveraged today than ever, having borrowed money that was cheap and abundant just a couple of years ago, when business was booming, Merola said.

Like a doctor discussing the aging process, Merola says these factors, combined with the recent downturn, make bankruptcy "inevitable" for some companies.

He has represented both creditors and debtors including the Stratosphere and Arizona Charlie's casinos and the former Aladdin and Resort at Summerlin properties in Las Vegas and the former Trump Hotels & Casino Resorts in Atlantic City.

He most recently represented holders of $960 million in bonds issued by Tropicana Entertainment, which filed for Chapter 11 bankruptcy protection in May after New Jersey regulators forced the company, which owns the Tropicana in Las Vegas, to sell its sister property and major profit center in Atlantic City.

Casinos in smaller or relatively untested markets are most at risk for bankruptcy but there are a handful in Las Vegas that are near the brink, he said.

"These are healthy companies that just borrowed too much money," he said. "They're doing well and making money and they're not at risk of closing. But the amount they borrowed is more than they can pay."

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