Santa Fe Gaming faces bankruptcy

John Wilen

Wednesday, Nov. 18, 1998 | 11:30 a.m.

Accusing Santa Fe Gaming Corp. of trying to "set the terms of its own bankruptcy," the Culinary Union's local research director urged bondholders to reject a Santa Fe debt exchange offer during a conference call Tuesday.

"Not only are noteholders tying their hands in bankruptcy, they are agreeing to a pre-packaged deal that might just land them back in bankruptcy a few years later," said the union's Courtney Alexander.

Santa Fe officials did not return calls for comment.

Santa Fe, owner of the Santa Fe hotel-casino in northwest Las Vegas and the Pioneer hotel-casino in Laughlin, appears to be teetering on the brink of bankruptcy. The company's Pioneer Finance Corp. subsidiary faces a Dec. 1 deadline to repay $65 million in outstanding principal and interest due on 13.5 percent interest bonds floated in 1988.

At that time, the bonds were used to raise $120 million to finance Santa Fe's acquisition of the Pioneer hotel-casino. Though secured by the Pioneer resort, the bonds are guaranteed by Santa Fe Gaming.

In late October, Santa Fe conceded Pioneer will not meet the Dec. 1 deadline, and asked owners of notes to exchange them for new 13.5 percent notes due in 2006. Anticipating the exchange offer will not be accepted by all of the noteholders, the company also asked noteholders to consent to two conditions. First, Santa Fe wants Pioneer noteholders to agree not to demand payment of principal or interest on the notes for two years. Second, in the event of a bankruptcy filing, the company wants noteholders to agree to a reorganization plan meeting the terms of the exchange offer.

In other words, noteholders agreeing to the terms of the consent solicitation would be bound in a bankruptcy proceeding to accept new 13.5-percent notes due 2006 in exchange for their existing notes.

Santa Fe said 45 percent of the Pioneer noteholders -- representing about $29.25 million in principal amount, and including the company's largest noteholder -- have so far agreed to the exchange and to the consent conditions. The consent solicitation will be considered accepted if holders of $42 million in principal amount notes agree to its terms.

It appears the only way Pioneer will avoid bankruptcy is if bondholders agree to the exchange offer. According to Pioneer Securities and Exchange Commission filings, the company will declare bankruptcy if the exchange offer is rejected and the consent solicitation is accepted. If, on the other hand, both the exchange offer and the consent solicitation are rejected, Pioneer says it may declare bankruptcy, or it may try to negotiate other exchange offers more acceptable to bondholders.

In any event, if Pioneer enters bankruptcy, so will Santa Fe Gaming and other Santa Fe subsidiaries.

"If (Pioneer Finance) were to become a debtor in a case under the bankruptcy code ... it is likely that Pioneer Hotel Inc. and Santa Fe Gaming Corp. would file for relief under Chapter 11 of the bankruptcy code," states a Pioneer Finance SEC filing.

Besides its Las Vegas and Laughlin casinos, Santa Fe plans a Henderson hotel-casino next to Galleria Mall. Santa Fe officials couldn't be reached for comment on how a bankruptcy filing would affect that project.

Alexander noted that Santa Fe has been trying to raise money to finance the Henderson project for years. If the company goes into bankruptcy over its failure to pay existing bonds, its unlikely anyone will loan it even more money, she said.

"I think it puts serious questions onto whether or not they can raise money," said Alexander.

Because Santa Fe bankruptcy filings would trigger accelerated repayment schedules on bonds secured by other Santa Fe-related companies and assets, it is likely that several other Santa Fe subsidiaries, including Santa Fe Hotel Inc., would also file for bankruptcy, the SEC documents say.

The Culinary Union is in the midst of a six-year labor dispute with the Santa Fe and its largest shareholder, the Lowden family. Alexander said the union and Santa Fe bondholders have "a commonality of interest."

"Investors and employees alike have suffered as Santa Fe Gaming has spent its resources for the last five years on chasing the next deal," said Alexander.

The note exchange offer and consent solicitation are essentially Lowden attempts to keep the company out of bankruptcy at the expense of bondholders, or to keep control of Santa Fe Gaming through a bankruptcy proceeding, said Alexander. While noteholders should be interested in seeing Santa Fe Gaming succeed, they should not give up their rights to maximize their investments.

"What the company is essentially trying to do with this ... is to limit how successful Pioneer noteholders will be in attempting to get the parent company to deliver on its guarantee, and to limit their access to (other Santa Fe assets)," said Alexander. "This takes the least amount of money or control away from (company president and largest shareholder) Paul Lowden."

Alexander believes noteholders will get the most back on their investments if they reject the exchange and consent solicitation.

"What I think is in the best interests of noteholders is to go after those assets in a bankruptcy proceeding," said Alexander.

In bankruptcy, she said, "I don't think they'll do worse," than the exchange offer, and "there's an opportunity to do better."

Santa Fe has had ample time to raise cash to pay noteholders by selling assets, Alexander said.

It is difficult to gauge what impact Alexander's call had on noteholders. Only three people asked questions on the call, and one of those clearly did not see things Alexander's way.

A caller identifying himself as Frank Pirosch argued that if the offer was good enough for Pioneer's largest bondholder, it was good for all bondholders.

"Doesn't he have more risk than anyone else?" asked Pirosch. "So if he supports it, why should not everyone else support it?"

Alexander replied that all bondholders should have the right to speak to the company about the offer, not just the largest bondholder. But Pirosch was clearly interested in more than discussing the Pioneer exchange offer. He was removed from the call after asking Alexander whether the Culinary Union's parent, the Hotel Employees Restaurant Employees International Union, was under federal investigation.

Other callers were more interested in the issue at hand.

"What is in the best interest of the Pioneer noteholders?" asked Ted Eggert, who identified himself as the owner of a small amount of the bonds. "What's the best of all worlds for us?"

And Sam Dilworth, a caller who did not say whether he owned Pioneer bonds, noted the large bondholder who has accepted the exchange offer could be affiliated with the company itself.

"This largest bondholder could conceivably even be part of the Lowden family," said Dilworth.

Santa Fe has not identified the bondholder.

Noteholders have until Nov. 24 to accept the exchange and solicitation offers. Noteholders who have already accepted the offers can change their minds before Nov. 24. Alexander said the Culinary Union will post a form to withdraw consents on the Union's anti-Santa Fe website, www.santafailure.com, within a few days.