Aladdin future up in the air after filing

David Strow

Monday, Oct. 1, 2001 | 10:48 a.m.

With the immediate threat of closure now lifted, officials with the Aladdin hotel-casino now must formulate a plan to get the $1.2 billion Las Vegas Strip resort out of bankruptcy.

But figuring out that plan may take some time, given the downturn of the city's tourism industry.

"If there is a plan, it's not something the debtor has made public," said Las Vegas bankruptcy attorney Candace Carlyon. "I suspect, as is the case with every gaming property in town, that they're taking a wait-and-see attitude. We need to get through this aberration (in Las Vegas tourism)."

While a sale is a possibility, now would be a poor time to try it with the Aladdin, said gaming analyst Andrew Zarnett of Deutsche Banc Alex. Brown.

"The dust would have to settle before they can go forward to determine a valuation for that property," Zarnett said. "Clearly the valuation is worth more in a stable market than today's current and more difficult market."

Before the terrorist attacks of Sept. 11 and their chilling effects on the nation's tourism industry, Zarnett believed the Aladdin could have fetched $400 million to $450 million in a sale.

"That's all changed," Zarnett said. "Trying to value it in today's market, where the Aladdin isn't the only property facing financial struggles, is difficult. You have to get some stability."

Recent history would gives that theory credence. Earlier this month the bankrupt Regent Las Vegas went on the sale block. It was built at a cost of $276 million in 1999 -- it sold for $80 million.

Besides the sale of the Aladdin, the other primary options for getting the Aladdin out of bankruptcy are reorganization and refinancing.

The Aladdin listed liabilities of $593 million and assets of $698 million in its Friday bankruptcy filing, though Aladdin attorneys acknowledge the current value of the hotel-casino has yet to be determined. The Aladdin's holding company, which did not file for bankruptcy, holds more than $140 million in separate liabilities.

In reorganization, the debt payment schedule can be altered, or debtors can agree to take stock in exchange for their debt. The most notable example of such a bankruptcy in Las Vegas was the Stratosphere, where financier Carl Icahn converted his debt holdings in the bankrupt property into stock, giving him majority control of the hotel-casino.

A reorganization could give the Aladdin a chance to operate profitably. The property has been recording positive cash flow -- $20.9 million through the first six months of 2001. But that wasn't enough to cover the $80 million in annual debt payments the Aladdin had been required to make, an imbalance that led to bankruptcy.

If the Aladdin does reorganize, it could open the door for Park Place Entertainment Corp. to take an ownership in the resort, as the Las Vegas casino giant holds about one-third of the Aladdin's junk bonds.

In a refinancing, new investors would pump new cash into the Aladdin, allowing it to emerge from bankruptcy on a more solid financial footing. Minority owner London Clubs International had been trying to engineer such a deal before the Aladdin fell into bankruptcy.

The Aladdin has time to consider each option. With Friday's Chapter 11 filing and a subsequent $9 million loan from its bankers, the Aladdin has enough cash to get through the next 45 days. The banks, which are already owed $434.5 million, have said they are prepared to lend up to $41 million more to the bankrupt property, enough to last through at least 2002.

"That gives the banks significant involvement in shaping this bankruptcy case," said one source involved in the bankruptcy. "Whatever plan is proposed, it has to provide for a check of $50 million (to the banks) to be effective."

The banks also have broad power to declare the property in default on this loan -- a move that would close down the Aladdin. Conditions of default include failure to make interest payments on the $50 million loan or "material variance from budget." The banks would only have to give notice three business days before shutting down the Aladdin.

The Aladdin had little choice but to take the loan.

"The cash needs of the Debtor are dire and immediate," the Aladdin said in bankruptcy documents. "Unless the debtor obtains ... financing, the Debtor will be forced to terminate its operations."

The Aladdin's bankruptcy also prevents its lease financiers, GE Capital Corp. and GMAC, from seizing the resort's 2,300 slot machines.

It is also possible that the Aladdin could get funds for a makeover while in bankruptcy. Analysts often pointed to the property's layout and entrances as major weaknesses, and officials have said the problems could cost as much as $100 million to fix.

"With the Aladdin, there had been discussions on how to increase foot traffic, and reconfigure ingresses into the property," Carlyon said. "If the debtor has a desire to do that, and the lenders have a desire to fund it, it is within the power of the bankruptcy court to approve it. It wouldn't be the first time that's happened."

But while the pressure was lifted from the Aladdin, it has been placed squarely on owners the Sommer Trust and London Clubs (LCI). In statement today, LCI said the Aladdin's bankruptcy filing places it and the Sommer Trust on the hook for an immediate payment of $150 million. LCI executives told Reuters News Service that their company's share of this payment was $37.5 million.

It appears very unlikely the two companies will be able to make that payment, as neither made an $8 million investment into the Aladdin that was required before the property fell into bankruptcy. LCI said it is in discussions with bankers to be released from its share of the $150 million payment.

If this situation can be resolved -- and the Aladdin reorganized or refinanced -- it is possible the Sommer Trust and LCI could remain in control of the Strip resort.

"It wouldn't be unusual for the ownership to remain unchanged or similar through a Chapter 11," Carlyon said. "It's more common than not."

But LCI, at least, doesn't believe that's likely. The London casino operator said today it might be forced to write off its investment in the Aladdin.