Station debt to take bite of workers’ benefit

By Liz Benston

Tuesday, Dec. 2, 2008 | 2 a.m.

Station Casinos’ decision to go private in a management-led buyout last year was hailed at the time as a smart, long-range strategy that would allow the company to escape the shortsighted demands of Wall Street.

Yet the debt needed to complete the $9 billion buyout forced what some Station employees will surely view as a shortsighted move: The company last week announced it will suspend its matching contributions to employee 401(k) plans starting Jan. 1 to cut costs.

Station is among the first gaming companies to suspend contributions to the retirement benefit.

The company said it will periodically evaluate the potential reinstatement of matching contributions.

The move isn’t surprising given that Station is among the most highly leveraged gaming companies during an unprecedented economic downturn that has disproportionately affected Las Vegas — a town dependent upon construction and population growth.

And yet it is perhaps more humbling for the dominant operator of suburban casinos, a business once believed to be largely sheltered from economic swings but that now appears to be bearing the brunt of the downturn.

Executives say companies can use cuts in 401(k) contributions, which can be viewed in some respects as a cut in pay, as a way to avoid the more drastic step of additional layoffs.

Station spokeswoman Lori Nelson said the company is looking at such actions “to keep as many of our team members employed as possible.”

Many casino companies, including Station, have laid off hourly workers in response to loss of business and have cut middle management to streamline operations.

Though Station has declined to disclose figures on total layoffs, the staff cuts are obvious at some of the company’s casinos, where gambling floors that would normally be busy during the week are nearly deserted. Rather than staff empty areas, the company, like many others, has reduced staff.

Although the economic decline was unanticipated, some say Station didn’t help its situation by spending more than $1 billion on Red Rock Resort, a luxurious locals casino that opened in phases starting in 2006. The company’s newest casino, Aliante Station, opened last month at a cost of $660 million.

Station reported about $5.4 billion in debt as of Sept. 30, up from $5.2 billion at the end of 2007, after the deal closed.

Compared with the same periods a year earlier, Station’s revenues were down 10 percent in the third quarter versus 7 percent in the second quarter, while earnings were down 13 percent, ahead of the second quarter’s 11 percent decline. At Green Valley Ranch, one of the company’s status properties, earnings are down 22 percent.

(Green Valley Ranch and Aliante Station are joint ventures between Station Casinos and the Greenspun family, which owns the Las Vegas Sun.)

It’s a major reversal for a company that has built or bought 14 casinos in about as many years and was propelled to unparalleled heights during the tourism and construction boom. The company’s growth plans, which were expected to be led by its planned Durango Station casino in the southwest and a proposed megaresort called Viva on Tropicana Avenue west of Interstate 15, will no doubt be on hold for years until the credit markets improve.

And yet, even critics of the company’s aggressive style and executive egos say Station’s experience competing fiercely for business, even when times were good, will stand the company in good stead as it makes what will likely be even more tough decisions in the coming months.

Last week, Station announced plans to exchange certain bonds coming due in the next few years for a pair of bond issues with 10 percent interest due 2016. That gives Station more time to pay its lenders but doesn’t fix the problem faced by many gaming companies — led by Station and Harrah’s Entertainment, which also went private a year ago through an expensive leveraged buyout.

Both companies are making interest payments on their debts yet still face potential defaults on bank loans given that banks generally require companies to maintain a certain amount of earnings relative to debts. Station has more than $10 of debt for every $1 of profit, a ratio that has increased in recent weeks as earnings have worsened and interest costs have risen. So-called leverage ratios that are more than eight or nine times earnings aren’t sustainable and could eventually lead banks to demand repayment, analysts say.

The industry’s two largest companies, Harrah’s and MGM Mirage, have not cut 401(k) contributions. Boyd Gaming, a Station competitor, declined to comment.

But MGM Mirage recently made two changes to its benefit plans to trim costs.

The company suspended contributions to a deferred compensation program for fewer than 1,000 high-level managers. Managers may still participate in the program, which allows them to receive a portion of their salary at a future date, though they no longer receive matching funds from the company. Also recently, MGM Mirage terminated a supplemental retirement program for executives that contributed company funds into a managed account.

While other major gaming companies haven’t yet made cuts to 401(k) contributions, gaming executives who requested anonymity say it’s an option that others will implement or at least consider amid the downturn.