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October 25, 2014

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Bondholders’ issue: Who best to run Station?

Owners’ offer would leave founding family in charge

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Mona Shield Payne / Special to the Home News

Kicking off the grand-opening celebration of Aliante Station Casino and Hotel in November 2008, colorful fireworks illuminate the northern sky above hundreds of spectators anxiously awaiting the doors to open.

Station Casinos bondholders are being asked to approve a prepackaged bankruptcy restructuring deal that involves exchanging their bonds for others worth less money, with a cash sweetener. Bondholders could accept the deal, expediting the court process and keeping the Fertitta family at the helm of the company. Or they could reject it and force the company into traditional bankruptcy, where creditors are on their own.

Last year, Station offered to exchange the bonds for discounted ones that would have been worth more than what the company is offering now. The kicker this time around is a proposed $244 million cash infusion from owners Frank and Lorenzo Fertitta and partner Colony Capital.

The idea is similar to the $1 billion infusion made by Las Vegas Sands Chief Executive Sheldon Adelson and his family last year. The cash reduced the company’s debt to a more manageable level, preventing lenders from forcing the company into bankruptcy.

At a time when company owners are either booted by investors for letting their companies fall into the hands of bottom-feeding creditors or competitors, these epic bailouts look like throwbacks to another era.

Cut off from bank loans and traditional financing during its early days, the casino industry relied on the wealth of a small group of insiders who understood its peculiarities.

The Fertittas, who learned the business from their father, have always viewed their industry as a long-term growth opportunity and chafed under the quarterly profit-driven demands of Wall Street.

It’s up to bondholders to decide whether the Fertittas know more about their business than anyone else and should be running the show.

If the economy doesn’t recover as Station expects it will, that $244 million, just like Adelson’s billion-dollar investment, will disappear.

Analyst Barbara Cappaert of bond research firm KDP Investment Advisors says such cash infusions by owners are unusual in this downturn. Many struggling companies have offered bondholders discounted notes to reduce interest costs but have put no new cash, as equity, into their companies.

Among them is Harrah’s Entertainment, which has a debt problem similar to Station’s after going private in early 2008. Private equity owners Apollo Management and TPG didn’t put in any cash to sweeten that bond exchange.

“Some equity holders are waiting to determine just how low this market goes, they’re walking away, or they don’t have the money to get back in,” Cappaert said.

Putting in new equity is better for bondholders than last year’s offer, but Cappaert said bondholders would still like to get more for helping Station restructure.

With a piece of the equity, bondholders would be able to participate in more of the upside if the economy recovers by 2010, Cappaert said. This plan would keep Station’s bank lenders satisfied through the rest of this year, she said.

Bonds can rise from depressed levels but are worth only face value, whereas stocks are also valued based upon future opportunities and other intangibles.

With earnings down, no major gaming deals to speak of and financing virtually nonexistent, Station’s unsecured bonds are trading at about 25 cents on the dollar and its subordinated bonds are trading at about 4 cents on the dollar — leaving a lot of room, Cappaert said, for improvement.

Some major law firms are depending on cash infusions from partners and even associates to stay afloat. But that’s peanuts compared with the bailout offers from Adelson and the Fertittas.

“It’s a substantial risk,” said Mel Jameson, a professor of finance at UNLV. “They are making an investment that the market as a whole is unwilling to do. But they have the resources and are familiar with the reality of the business.”

Correction: This story has been changed to reflect that owners Frank and Lorenzo Fertitta and partner Colony Capital are proposing a $244 million cash infusion, not $244 billion.

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