Gaming:

Station, Harrah’s to bondholders: Help us refinance

Struggling empires seek to lower costs, buy time

Tuesday, Dec. 9, 2008 | 2 a.m.

Chris Morris

Denny’s makes inroads at Station properties (12-5-2008)
Harrah’s vice chairman stepping down (12-3-2008)
Station debt to take bite of workers’ benefit (12-2-2008)
Earnings drop at Harrah’s, cost cuts to continue (11-7-2008)

With no sign of an economic recovery on the horizon, Station Casinos and Harrah’s Entertainment are bargaining with lenders to help resolve their cash flow problems.

It’s a high stakes poker game: Both companies — loaded up with debt from leveraged buyouts set in motion before the downturn — are determined to stay out of bankruptcy, and lenders are seeking to walk away from the table with as much money as possible.

Although Harrah’s bondholders appear to be cooperating, a majority of Station bondholders are resisting that company’s plan to refinance some of its debt.

Lately, the companies are attempting to capitalize on a decline in bond prices by buying back old notes and exchanging them with new, discounted notes that have extended maturity dates, potentially saving more than a billion dollars in principal and interest.

Although some bondholders are giving companies more time to wait out a recovery, others want more reward for their risk.

Investors holding 66 percent of Station’s publicly traded bonds last week notified the company of their refusal to swap their notes, calling Station’s offer “deficient.”

Station is offering to exchange about $2.3 billion in publicly traded bonds for just over $700 million in new notes trading for about 50 to 20 cents on the dollar — a deal that could reduce the company’s debt by more than $1.4 billion.

Once exchanged, analysts say, these bonds could trade at 9 cents to 29 cents on the dollar, the market value of the old notes. Their value has dropped based on the likelihood of bankruptcy.

Although the new notes would be worth less, in a bankruptcy they would have priority over the existing notes owned by bondholders who didn’t make the exchange.

Harrah’s made a similar offer to its bondholders recently, and many swapped their notes.

Unlike Harrah’s, Station’s owners are sweetening the pot with what sounds like a rich ante: They have offered to pony up $450 million to $500 million to reduce the company’s debt if bondholders agree to the swap.

The offer has strings attached. Unless 82.5 percent of the old bonds are exchanged, the owners’ loan would be ahead of both the old and new bonds in the capital structure. This means that Station’s Fertitta family, which owns about 24 percent of the company, or Colony Capital, the private equity firm that put up the majority of the money in the buyout, would be paid before bondholders in a bankruptcy.

Most bondholders thought they were getting a raw deal, and they’re back at the negotiating table. They might seek more principal, a higher interest rate on their bonds, or a better position in the capital structure, which would benefit them if the worst happens and the company files for bankruptcy.

Analysts say Station will likely default on the company’s bank loans by year’s end because it has too much debt relative to cash flow. That could allow the bank to demand repayment, triggering a filing for bankruptcy protection.

That’s a risk even if the bond exchange is successful because cash is tight, analyst Barbara Cappaert of bond research firm KDP Investment Advisors said.

The bond exchange is no bluff.

The upside for bondholders is that it would reduce debt while giving Station time to recover and a shot at avoiding bankruptcy, Kimberly Noland of research firm Gimme Credit said in a research note to investors last week.

Cappaert added: “They’re trying to buy more time when they need to get a more permanent solution together.”

The Station offer to pay down debt isn’t as rich as the $1 billion cash infusion Las Vegas Sands Chief Executive Sheldon Adelson provided his own company recently. Granted, Adelson had little choice. Some analysts say Las Vegas Sands was more in danger of default than either Station or Harrah’s.

And yet, while Station proffers cash in the form of debt, Adelson’s investment — which involved $475 million in convertible bonds that he converted into stock and another $525 million in stock — was preferable for bondholders because they would be paid before stockholders in a bankruptcy.

Although Harrah’s and Station both risk default because of ballooning debts, Harrah’s has a bit more flexibility than Station these days. Harrah’s has an agreement that allows the company to accumulate more debt without violating the leverage requirements of its banks. Harrah’s also can add the value of future cost savings to its cash flow figures, inflating earnings calculations and keeping the company out of immediate danger of default.

And yet, this is more than a numbers game. It’s a fight for survival, with egos and personalities at play.

That’s a plus for Station, a family-owned company whose executives “have a lot of pride and ego tied up in their success,” Cappaert said.

That’s not necessarily the case with Harrah’s, which is owned by two private equity firms, TPG and Apollo, with countless investors. “We’re not talking about a family’s life’s work” as with Station’s Fertitta family or Adelson, Las Vegas Sands’ founder and majority owner, she said.

Although Station’s latest bargaining chip might have flopped, the company might not be putting its best offer on the table just yet. A slight improvement in the economy, however minor, might allow the company to refinance debt on more favorable terms.

“They’re taking a real gamble. It’s like playing poker with the capital markets,” Cappaert said.

Discussion: 12 comments so far…

By Justsayin

12/9/08 at 6:35 a.m.

Suggest removal

Dear Station Casinos and Harrah's Entertainment,

You can not borrow your way out of debt.

Signed,

Dave Ramsey
By kenodave

12/9/08 at 8:52 a.m.

Suggest removal

"They're taking a real gamble. It's like playing poker with the capital markets," Cappaert said.

And they are using employee jobs and benefits as their ante.
By gold1020

12/9/08 at 9:01 a.m.

Suggest removal

Don't expect any type of economic recovery for at least 3-5 years. It's not gonna happen.
By LasVegas2009

12/9/08 at 9:37 a.m.

Suggest removal

They are just pushing bankruptcy into the future rather than have it now. Good luck, I hope for all of us in Las Vegas they find a way to keep these businesses going. The big three are getting bailed out but what about Las Vegas I would rather see that money or some of it go into our valley rather than Detroit. We all know the success of Las Vegas demands that the casino industry survives.
By kramer

12/9/08 at 11:08 a.m.

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As the statement goes pigs get fat and hogs get butchered! I guess if the hogs had not cannibalized themselves by eliminating competition and raising prices to an unaffordable level perhaps they would not be staring bankruptcy right in the eye. No one should bail out the hogs as they created their own mess and the best thing that could occur is that they are forced to sell off properties to other owners to create more competition so that Las Vegas can once again become a more affordable place for locals and tourist alike.

While all aspects of our economy are taking a major financial adjustment why should not the corporations that were the precipitating reasons behind the meteoric rise in the overall prices suffer as well? Las Vegas and the casino industry is entering a change once again akin to the change that occurred when the Hughes bought out properties from the mob. Hopefully this change will be for the better.
By TONYJUNIOR

12/9/08 at 2:57 p.m.

Suggest removal

SELL EM OFF HARRAH;S AND MGM OWN ALMOST EVERY HOTEL ON THE STRIP MONOPLOY

AND GIVE THE BETTORS FREE DRINKS IN THE SPORTSBOOKS
By acrosby85254

12/10/08 at 4:27 a.m.

Suggest removal

Harrah's should shoot a new commercial, like the one with that big dude saying "if you have a gambling problem were here to help"... or words to that effect. The new one should say "all degenerates welcome, and if you have a gambling problem just mask it with alcohol or drugs, cause we need all the dough we can get or hands on."
By scouser

12/10/08 at 5:43 a.m.

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Harrahs have definitely tightened their video poker machines just came back from thanksgiving break. This was my 15th trip to vegas and had the worst payout on the machines I have ever experienced. I am staying away next year and will come back in 2010.
By tvegas

12/10/08 at 10:11 a.m.

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Boycott Stations ..let them file Chapter 11
...say goodbye the the hubris of the Ferttitas
By oldvegas

12/11/08 at 9:07 p.m.

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Harrahs stratagy of turning middle class America into compulsive gamblers has backfired. Gary Loveman took all the cash out of this company for himself. Americas middle class no longer has paychecks to trade for V.I.P cards that do nothing but entice people to gamble above their means for empty promises. Mr. Loveman should have left some money in the till for his bondholders and employees. SHAME
By oldvegas

12/11/08 at 9:20 p.m.

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For any of these casino companies to mention responsible gaming is insulting. I,ve seen 5 star properties wait untill drunks lose every last penny before asking them to quit. The message that these bond holders need to know is that the cow has been milked dry. Say what you want about the MOB but today we have real criminals in charge of these gaming companies.
By harrahswhistleblower

2/19/09 at 6:25 a.m.

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Under the fine leadership of Gary Loveman, Harrah's Entertainment, Inc. not only illegally remodeled thousands of their hotel rooms, but they also left those same rooms unsafe for the public to stay in. So the largest Gaming Company in the world decided to willfully put both their valued Guests & employees at risk for the sake of their precious bottom line. Instead of fish fry Friday's, Harrah's tried to fry their Guests by providing them rooms that were, now documented, "public fire safety traps," for years & years. After the MGM Grand Fire hotels had to install redundant fire safety systems: fire alarms, sprinklers, and smoke control construction (i.e. fire caulk, fire rated walls, flame retardant materials in rooms etc.) a great concept on paper, but for some reason not something embraced by Harrah's as important. I say this because Harrah's redundant fire safety systems were all compromised as a direct result of their illegal remodels.

Unfortunately, the story does not end here because during the course of Harrah's numerous illegal remodel projects they managed to expose their employees & Guests to asbestos, and in the process broke both state & federal laws. These were willful acts, and in my mind criminal in every sense of the word. They knew that asbestos was a present danger, yet Harrah's did nothing to protect either their employees or guests. Then there was the mold...nice black mold at the Rio, at the Flamingo, and at Harrah's - if anyone is interested I will be glad to tell you how they handled it.

For some reason Harrah's believes that it is above the law...maybe it is because they have friends in high places or should I say the right places. OSHA did nothing to protect the workers - except for a slap on the wrist. The Gaming Control Board uttered a short statement about 14 months ago, stating that if Harrah's actions were deemed to be willful acts that they might take action against them...Harrah's decided to circumvent the permit process, and did not adhere in any way shape of form to accepted construction standards - none of the rooms met code, Harrah's lied to the County repeatedly about the remodels when first approached - pretty much denied everything until the walls were actually opened up and told the story...no one forced Harrah's by gunpoint to do what they did, which in my mind makes what they did a WILLFUL ACT! The non-transparent State Contractors Board has done zero, zippo against any of the Contractors that were involved in the illegal remodel projects...including Harrah's which did not have a license in-house to act as the General Contractor on the remodel projects. Three agencies entrusted with protecting the public from harm, and not one of them has done jack...but that isn't a surprise in Las Vegas or for that matter Nevada.