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November 20, 2014

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Station Casinos bondholders want permission to sue

Bondholders say 2007 deal left gaming company crippled with debt

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Station Casinos Inc.'s bondholders asked the Las Vegas company's bankruptcy court Monday for permission to sue the company over the 2007 leveraged-buyout deal that took Station private, charging the transaction crippled the company by saddling it with excessive debt.

Attorneys for Station have not yet responded to Monday's request, but they have argued the going-private deal -- valued at $8.8 billion including debt -- was not successful because of the recession; as opposed to the terms of the deal that creditors say encumbered the company with an additional $1.7 billion in debt.

The bankruptcy case's Official Committee of Unsecured Creditors charged in court papers Monday that the additional debt was "a crushing burden that offered virtually no value in return."

"This debt crippled the company to the detriment of all of its stakeholders, including employees, who looked to the insiders for protection, not self-dealing," the creditors charged, complaining top Station executives received hundreds of millions of dollars from the deal that included cash payments of $90 per share.

The unsecured creditors propose to sue Station insiders including executives and members of the founding Fertitta family as well as at least three banks involved in the buyout: Deutsche Bank, Deutsche Bank subsidiary German American Capital Corp. and JP Morgan Chase Bank.

"The bank defendants profited handsomely as well -- they received millions of dollars in fees, they lent funds at profitable rates and they obtained liens on nearly all of the assets of the debtors and the debtors' non-debtor affiliates, thereby leapfrogging the pre-existing claims of innocent creditors," the unsecured creditors' filing charged.

The "innocent creditors" refer to some of the holders of $2.3 billion in bonds issued in 2004 and 2006 -- debt assumed by the company that emerged from the buyout involving members of the Fertitta family and Los Angeles buyout company Colony Capital.

The creditors also repeated their longstanding complaint about a provision in the buyout in which Station leases four of its most profitable hotel-casinos from itself. Those properties are Red Rock Resort, Sunset Station, Boulder Station and Palace Station and are encumbered by $2.475 billion in debt.

The creditors have complained the rental payments are diverting money from all creditors to the banks to cover the mortgage payment.

Rent under the 15-year lease has been costing the company $249.5 million annually, but was recently reduced by $7.7 million per month for December, January and February as Station works on a reorganization plan.

Station and its hired experts insist the lease deal is legitimate, but the unsecured creditors call it a financing transaction subject to rejection or adjustment in the bankruptcy case.

"Slapping a 'lease' label on a loan does not make it a lease," the unsecured creditors charged in their filing Monday.

The creditors, who have already asked that a trustee supervise Station during the bankruptcy proceedings, proposed filing a lawsuit challenging the lease deal and another lawsuit asserting claims of fraudulent transfers related to the $90 per share buyout and allegations of breach of fiduciary duty against Station's officers and directors.

Station, with 18 gaming properties in the Las Vegas area and a big Indian casino in the Sacramento area, reported for the third quarter a loss of $455.5 million, including $370.7 million in costs related to its bankruptcy reorganization.

The company said quarterly net revenue of $255.7 million was down from $317 million in 2008's third quarter as high unemployment in the Las Vegas area reduced spending at Station's properties.

The company, in the meantime, has been resisting efforts that it be acquired by Boyd Gaming Corp. of Las Vegas. Boyd on Dec. 16 offered $2.45 billion for the company.

The creditors, in Monday's filing, noted the $2.45 billion -- if accepted -- would fall far short of covering Station's debt and liabilities last reported at $6.8 billion.

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