Bankers’ help likely needed to keep Aladdin from bankruptcy

David Strow

Wednesday, May 2, 2001 | 11 a.m.

The Las Vegas Strip's $1.2 billion Aladdin hotel-casino passed a potentially dangerous date Tuesday with no difficulties, but will likely need assistance from its bankers later this summer to avoid bankruptcy, Wall Street analysts say.

The potential danger was an $11.3 million interest payment on the Aladdin's bank debt due Tuesday. It was the first such payment due since the Aladdin warned in its April 2 annual report that "cash on hand and projected internally generated funds ... will not be sufficient to fund all the principal and interest payments on the company's debt during 2001."

Aladdin officials could not be reached for comment; however, Bloomberg News reported the payment was made as scheduled, quoting Aladdin officials.

The Aladdin had $13.4 million in unrestricted cash on March 22; the Sommer Trust, the property's majority owner, made a $7 million cash infusion eight days later. The resulting $21.4 million in funds would have been sufficient to cover the $5 million principal payment made March 30 and the $11.3 million interest payment made Tuesday.

But now it gets dicey. A $4.9 million principal payment comes due June 29, and a $9.7 million interest payment follows Aug. 1. From now through February 2002, the Aladdin must make a total of $45.5 million in principal and interest payments on its bank debt.

Moody's Investors Service estimated in April that the property has about $410 million in bank debt outstanding.

By contrast, the equity of the Sommer Trust and minority owner London Clubs International was valued at $32 million, as the stock's value was largely offset by accumulated deficits.

"If the summer is tough for the property, that (the August payment) would probably be the one that would be very difficult to make," said Eric Matejevich, gaming analyst for Merrill Lynch, who recently lowered his rating on the Aladdin's bonds from "speculative buy" to "neutral."

The Aladdin posted $11 million in cash flow from Aug. 18 to Dec. 31, 2000, not enough to completely cover interest and principal payments on its debt. Cash flow was a negative $3.2 million for the quarter ending Sept. 30, and positive $14.2 million for the Dec. 31 quarter.

But the Aladdin's bankers, led by the Bank of Nova Scotia, do have some flexibility in dealing with the Aladdin's debt. They could lengthen the amortization schedule on the bank debt -- that is, pushing back the repayment dates of the principal on the Aladdin's loan, but probably not the interest.

"The ball's very much in the banks' courts," Matejevich said. "They're either going to be forgiving ... future payments temporarily, or you've got this situation on your hands where the property would be forced to restructure."

If principal payments were delayed, the Aladdin's expenses would be reduced by $16.7 million for the remainder of the year.

Andrew Zarnett, gaming analyst with Deutsche Banc Alex. Brown, believes the banks will be willing to go along if the Aladdin can show operating results are improving.

"Clearly, the investors on the bank side are supportive of having the current folks keep on running the show," Zarnett said. "A management team with a lot of equity at stake is more likely to run the place more efficiently than a group forced into bankruptcy whose equity stake is gone.

"Banks are in the business of lending money, not operating a business."

Whether the Aladdin's situation will improve enough to convince the bankers to loosen up on the Aladdin remains to be seen.

"It's hard to determine, because it depends on the operating performance of the property between now and (the Aug. 1 due date)," Zarnett said. "As long as performance gets better and banks show some flexibility, the company can move forward without going through Chapter 11 (bankruptcy)."

The banks have already made some concessions to the Aladdin to help it through a tough opening year. In its annual report, the Aladdin said its bankers relaxed certain credit requirements, including the property's minimum debt-to-cash flow and interest coverage ratios. These waivers will expire on June 30, and it is likely the Aladdin will need to negotiate new waivers by then, Matejevich said.

The wild card is the ability and willingness of the Sommer Trust and LCI to make additional capital injections as needed by the property. The Aladdin said in early April it will continue to rely on its owners for cash, and the two are obligated under bank agreements to make up to $30 million a year in "keep-well" payments. The $12 million in payments made earlier this year counted toward year 2000 totals, and do not reduce the $30 million obligation for 2001.

But the Sommer Trust, despite its recent payment, has had liquidity problems in the past. That's left LCI holding the bag for most of the Aladdin's capital calls, and LCI's resulting financial struggles has left that company a possible takeover target.

Whether Sommer and LCI will put more cash in "is the million-dollar question," Matejevich said. "I was surprised when they infused the ($12 million). We'll see what they come up with, if anything."