Bankruptcy filing bails out Aladdin

David Strow

Monday, Oct. 1, 2001 | 9:33 a.m.

The $1.2 billion Aladdin hotel-casino came within mere hours of the unthinkable Friday -- shutting its doors to the public.

Already struggling under a massive debt load, the 16-month-old Las Vegas Strip resort had little margin for error when September -- traditionally one of Las Vegas' strongest months -- began. When hijacked planes slammed into the World Trade Center and the Pentagon Sept. 11, that traditionally busy month became a drought, and left the Aladdin hanging on by its fingernails.

When the Aladdin's attorneys came before bankruptcy Judge Robert Jones Friday afternoon, they didn't mince words about how dire the situation had become.

"There isn't enough money to keep operating through this evening without more funds," Aladdin bankruptcy attorney Gerald Gordon said.

"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."

Fortunately for the Aladdin and its 2,600 employees, that fate was averted Friday afternoon, when the Aladdin's owners -- the Sommer Trust and London Clubs International -- gave their approval for a Chapter 11 bankruptcy filing.

With the bankruptcy, the Aladdin received approval for a $9 million loan from its banks -- enough cash to keep open for the next 45 days. The banks, led by the Bank of Nova Scotia, have said they're willing to lend the bankrupt property up to $41 million more -- enough to keep the property operating through at least the end of 2002, Gordon said.

The property listed liabilities of $593 million and assets of $698 million, though Aladdin attorneys admit 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.

The largest creditors, according to the Aladdin's bankruptcy documents, are the banks, which are owed $434.5 million. That number will rise, depending on how much of the $50 million credit line the Aladdin needs.

Friday's filing also stops GE Capital Corp. and GMAC, the Aladdin's lease financiers, from seizing the resort's 2,300 slot machines and other equipment -- something the companies could have done Saturday, following the Aladdin's failure to make a $4.3 million lease payment in early September.

It also stops, at least temporarily, the $80 million in annual debt payments the Aladdin had been required to make. Until September, the Aladdin had been recording positive cash flow -- $20.9 million through the first six months of 2001 -- but these debt payments led to big losses: $67.6 million over the first six months of the year.

Without those debt payments, the Aladdin would be marginally profitable if business starts to recover. It has yet to be determined how much in debt and lease payments the Aladdin will have to keep making while it is in bankruptcy.

"This is not a Regent (Las Vegas)," said Gordon, referring to the bankrupt Summerlin hotel-casino that was experiencing sustained negative cash flow. "This is a property that is operationally viable."

If the Aladdin can once again record positive cash flow, it will give attorneys time to formulate a plan for emerging from bankruptcy. Typically, these plans fall into one of three categories: reorganization, refinancing or sale.

"Those are the basic trinity of a successful Chapter 11," said Candace Carlyon, a Las Vegas bankruptcy attorney representing GE Capital in the Aladdin case. "If there is a plan, it's not something the debtor has made public. 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)."

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.

If the Aladdin follows a similar path, it could open the door for Park Place Entertainment Corp. to take a position in the resort, as the Las Vegas casino giant holds about one-third of the Aladdin's junk bonds.

In a refinancing, new investors pump needed cash into a bankrupt company, allowing it to emerge from bankruptcy on a more solid financial footing. LCI had been trying to engineer such a deal before the Aladdin fell into bankruptcy.

With either of these scenarios, it isn't out of the question that Sommer and LCI could remain in control of the Aladdin, Carlyon said.

"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."

It is also possible is 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 had 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."

The third possibility is the sale of the Aladdin. If this occurs, proceeds from the sale are simply distributed to creditors until the cash runs out. This is what occurred with the Regent Las Vegas.

But a sale can have a disappointing outcome for creditors. When the Regent came up for sale earlier this month, potential bidders had dried up because of the city's downturn. The luxury property, built at a cost of $276 million in 1999, ended up selling for $80 million. The price was a disaster for creditors, who were owed in excess of $300 million.

No matter what occurs, the Bank of Nova Scotia and its fellow banks appear to be firmly in control of this bankruptcy case, since the Aladdin cannot emerge from bankruptcy until the $50 million credit line is repaid in full.

"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 loan agreement also gives the banks broad power to declare a default on the loan and shut 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.

But this would be an alternative of last resort for the banks, who, like everyone else in this bankruptcy case, want to be paid.

"The termination of business operations will destroy the going concern value of the (Aladdin's) business enterprises as a whole, minimizing the potential value of the estate for the creditors," the Aladdin's bankruptcy documents say.