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September 30, 2014

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Creditors probe deal that took Station private

A group of creditors in the Station Casinos Inc. bankruptcy case revealed Wednesday it's investigating the 2007 deal in which the Las Vegas company was taken private -- a deal the creditors say involved questionable terms that now threaten recovery of funds by the creditors.

Attorneys for the Official Committee of Unsecured Creditors made the revelation in a motion objecting to plans by Station and some of its bank lenders to spend cash during the bankruptcy process.

The committee, appointed by the U.S. Trustee assigned to the case, complained about a plan by Station and certain lenders to have Station essentially continue leasing four casino properties from itself for $249.5 million per year.

The rent represents funds that would be unavailable to creditors, the committee complained.

The four casinos in the group, called "PropCo," are encumbered by a $2.475 billion loan involving Deutsche Bank and other lenders.

They were mortgaged to pay for the 2007 going-private transaction, records show.

When the deal to take Station private was announced in 2007, Station and its advisor, Bear Stearns & Co., said it made sense for public shareholders. But after completion of the deal, the economy entered a deep recession and Station's financial results suffered, causing it to default on its debt obligations this year.

Station and certain subsidiaries filed for bankruptcy protection July 28 and its casinos and hotels remain open as the company works to restructure its debt. The company is controlled by Colony Capital of Los Angeles and the Fertitta family of Las Vegas.

Even after the debt obligations of the four PropCo properties are covered, a "cash-trapping" mechanism would improperly prevent $30 million from flowing to the parent company over a 13-week period, the creditors complained Wednesday.

The four hotel-casino properties in PropCo are Palace Station, Boulder Station, Sunset Station and Red Rock Resort.

Station attorneys have not yet responded to the creditors' committee's filing and the company had no comment on it, a spokeswoman said Thursday.

In its objection, attorneys for the committee said:

--The $5.77 billion going-private deal "provided payments to insiders of approximately $500 million, including $300 million to the Fertitta family, and resulted in ownership by insiders of approximately 25 percent." The deal included $4.17 billion to buy out shareholders and the assumption of $1.6 billion in debt, the committee said.

--"The net result of the leveraged buyout (LBO) was that Station Casinos leveraged to the hilt four of its most valuable properties, leaving Station Casinos and its creditors questionable benefit in return, while insiders of the debtors benefited immensely."

--"The facts surrounding the LBO, the financial condition of Station Casinos after the LBO and the resulting bankruptcy filing of the debtors require close investigation by the committee and assessment by this court. At this stage, the facts ascertainable to the committee suggest a basis for at least fraudulent conveyance and recharacterization claims ..."

--Encumbering and transferring property as part of the leveraged buyout may have been improper in that this may have involved transfers at less than fair value; and the transfers involved a technically insolvent company or the transfers caused the company to become insolvent.

"What is established by publicly available information is that the LBO was followed with the almost immediate financial collapse of the debtors burdened by this huge debt structure," the creditors complained.

The creditors' investigation is on top of two other complicating factors in the bankruptcy case:

--Station has disclosed that after it failed to pay interest due on its unsecured bond debt in March, it was informed by bondholders that a "bankruptcy case would be highly contentious and that litigation was likely to be initiated by creditors against Station Casinos and others."

--Station has formed a "Special Litigation Committee to the Board of Directors." The committee was formed to investigate and deal with any potential legal claims arising from the going-private deal. Station has said its advisors are analyzing if the going-private deal was reasonable and analyzing Station's solvency, on a going-concern basis, at the time of and following the transaction.

A Sept. 2 hearing is planned on Station's latest plan to spend cash during the bankruptcy proceedings.

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