Grand Casinos withdraws bankruptcy participation

Ed Koch and Gary Thompson

Thursday, Oct. 9, 1997 | 1:51 a.m.

Grand Casinos Inc. said today it is halting efforts to participate in the Stratosphere Corp. bankruptcy reorganization process.

While expected, Grand's announcement, coupled with Wednesday's surprising collapse of financier Carl Icahn's proposal for reorganizing the bankrupt Marvel Entertainment Group Inc., may slow the progress of Stratosphere's emergence from Chapter 11 proceedings.

The hotel-casino is expected to remain open as Icahn's restructuring proposal works its way through the bankruptcy process.

"Last year we wrote off our investment and now we have withdrawn our plan because (the current operators of) Stratosphere say they have a better one," said Grand spokeswoman Jaye Snyder.

Stratosphere's management team has concluded that Icahn's proposal, which calls for giving secured creditors most of the equity in the reorganized company, is better than Grand's latest proposal.

Icahn's High River Limited Partnerships is a principal in both the Marvel and Stratosphere bankruptcy cases, leading to some speculation he has a long-range strategy that would use Marvel's popular comic-book characters to promote the Stratosphere.

Icahn used High River to buy, at bargain-basement prices, secured mortgages in the two companies after they had defaulted on debt payments.

He acquired $101.61 million, or 50.05 percent, of Stratosphere's $203 million of first-mortgage notes. But because Stratosphere had defaulted on payments, the notes were trading at 60 cents to 70 cents per dollar of face value, allowing Icahn to acquire a majority of the secured debt for far less than the face amount.

Icahn followed a similar strategy at Marvel, teaming up with Toy Biz Inc. -- itself 28 percent owned by Marvel -- and others to buy a majority interest in more than $700 million of the entertainment company's secured debt.

He then proposed reorganization plans for the companies that would require approval by holders of a majority of the debt, as well as the respective bankruptcy judges.

The Marvel proposal required banks holding 67 percent of the secured debt to agree to his plan, while his Stratosphere proposal needs approval by holders of 57 percent of its debt.

The Marvel deal collapsed Wednesday when Toy Biz offered its own last-minute reorganization proposal, convincing enough bank creditors it was better than Icahn's plan.

Grand's withdrawal from the Stratosphere process leaves Icahn as the only one offering a plan for the hotel-casino. Former Stratosphere Chairman Bob Stupak reportedly wanted to participate, but hasn't offered any alternatives.

The proposals by Grand, which owns 42 percent of Stratosphere's stock, and Icahn each would have resulted in the current stockholders' equity being cancelled and new shares being issued to the secured creditors, who'd own 100 percent of the hotel-casino.

Icahn's plan calls for High River and another affiliate, American Real Estate Partners, to infuse $100 million for construction of another 1,000 rooms at the 1,500-room resort -- a moved deemed critical to provide enough customers for the casino. Another $100 million would be used to reduce debt.

Grand's withdrawal from the Stratosphere reorganization process doesn't end its possible financial exposure. Court hearings are scheduled for December on a standby-equity commitment that called for Grand to pay up to $60 million to Stratosphere if the resort's cash flow fell below certain minimums.

The Stratosphere has been struggling to stay afloat since shortly after the resort and its 1,149-foot tower opened in April 1996 and hasn't met the cash-flow minimums.