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Herbst Gaming, which owns Terrible Herbst casinos, is the furthest along in the bankruptcy reorganization process of any of the major Las Vegas gaming companies. The Herbst family will own 90 percent of a new company that operates slot machines, with bank lenders owning 10 percent.
Tuesday, March 17, 2009 | 2 a.m.
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On the Brink
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Sun Archives
- Before recession, success further fed gaming industry’s egos (3-16-09)
- Economy prompts Ameristar Casinos to amend loans (3-16-2009)
- Hard Rock Hotel posts $282.3 million loss in 2008 (3-13-2009)
- Gaming supplier says loss narrowed in quarter (3-12-2009)
- Herbst Gaming seeking bankruptcy protection (3-10-2009)
- Casino winnings plunge 14.7 percent in January (3-10-2009)
- Some casinos might be for sale, but pricing them is tricky business (3-9-09)
- Boyd responds to Station’s rejection of buyout (3-9-09)
Beyond the Sun
Finally, a bit of good news for Las Vegas: Our casino behemoths might seek Chapter 11 bankruptcy protection.
Taking a dire step like that conjures up images of companies failing in dying industries. But Las Vegas is nothing of the kind. Profits are down by more than 20 percent, but that’s hardly enough to kill off the world’s biggest gaming companies.
The problem is that those companies built their future on an assumption of strong growth. They overextended themselves with huge debts. Seeking Chapter 11 protection would allow them to restructure those debts and build new business models based on the realities of today’s economy.
Successful bankruptcy reorganizations avoid worst-case scenarios in which companies have run out of money and must close their doors, selling assets at fire-sale prices to pay creditors. If launched early enough, reorganizing debt allows businesses that are still making money and have long-term growth prospects — such as casinos — to continue operating, with their workforces intact.
Among the companies that may be considering Chapter 11 filings are MGM Mirage, Harrah’s Entertainment and Las Vegas Sands. Station Casinos and Herbst Gaming have indicated they will file for bankruptcy protection.
Casinos can emerge from bankruptcy in stronger financial shape because they are cash cows thanks to a product — recreation — that may be less popular these days, but is hardly obsolete.
Like overmortgaged consumers who built and acquired homes on cheap credit, casino companies accumulated more than $50 billion in debts during the boom to finance growth. Collectively, their casinos are now worth less than the money owed by their companies. Like many homeowners underwater on their mortgages, these companies can significantly reduce their debts by seeking bankruptcy protection.
And yet, there’s one major difference between casinos and businesses in other industries that works to casino owners’ benefit.
Unlike other kinds of businesses, casino owners must undergo background checks by state regulators. So it’s less likely there is less danger that a lender will want to seize a casino’s assets if it first must be licensed by state gaming regulators.
Casino lenders generally aren’t eager to foreclose on a property because many banks and other investors don’t want to go through the lengthy and burdensome licensing process, bankruptcy experts said. Nevada law allows passive investors to control up to 15 percent of a company without being licensed.
In a sense, many casino companies are operating as if they are in bankruptcy. They have cut costs by hundreds of millions of dollars — an industry record — and have laid off thousands of workers.
Extreme cost-cutting by Strip giants in this recession — while a prudent move in troubled times — will hurt Las Vegas long-term by depressing the value of casino properties and taking a toll on customer service, Dennis Farrell, a bond analyst with Wachovia Capital Markets, said in a research note to investors last month.
Better that companies seek bankruptcy protection, he and others said, because, shielded from creditors, company revenue could be applied to operations and property enhancement.
A casino, like any other business in Chapter 11, might also secure additional new financing through bankruptcy court.
As a general rule, lenders don’t want to end up owing casinos, but rather want to get paid and move on. So negotiations between some casino companies and banks to restructure debt are under way.
This round of restructuring, resulting from the worst downturn in the modern casino era, will likely be different from past business cycles where casinos have simply changed hands between known casino operators, experts say.
That’s because of a lack of available financing and a dearth of buyers with the means to put up significant cash.
While private equity investment firms have been licensed as part-owners of casinos — think Harrah’s and Station — these groups usually take a back seat to experienced casino operators, who are involved in day-to-day management.
And yet, with lenders seeking the best return on their money, many believe this recession will result in a significant number of lender groups, especially banks, taking ownership in casino companies — at least in the short term.
Here’s why: Casino companies still generate tens of millions, if not hundreds of millions, in cash a year. Last year lenders would have been more sympathetic in a global downturn, hopeful that these giants would recover by the end of 2010.
Now, the prospect of recovery is farther off, and the recession is likely to worsen in the near term.
That leaves the highest-leveraged casino companies running out of viable options, such as selling casinos, because there are few cash-rich and gutsy buyers in today’s market.
This leaves lenders considering casino ownership as the best option to recoup their investments.
That prospect concerns some longtime casino executives, who wonder whether banks or other lender groups that end up owning chunks of gaming companies will make decisions in the best interest of Nevada’s gaming industry and its economy. Banks taking casino profits back to New York, for example, might be less interested in reinvesting that wealth in Las Vegas.
Herbst Gaming, the farthest along in the bankruptcy reorganization process of any major Las Vegas gaming company, offers an example of what may come for others. This month lenders agreed on a plan to take control of Herbst’s casino properties, with the Herbst family owning 90 percent of a new, separate company that operates slot machines in small locations such as gas stations and grocery stores. Bank lenders would own the remaining 10 percent.
The lenders may find resistance, though, from original equity owners who tend to be company founders or longtime gaming families who hold a big chunk of the company’s equity, bankruptcy attorneys said.
As a result, owners often strike deals with lenders at the top of the pyramid — the ones who get paid first in bankruptcy — allowing owners to retain control of certain properties in exchange for reduced or forgiven debts. Lenders farther down the pyramid, such as bondholders, often get cents on the dollar in bankruptcy and may be more willing to negotiate with companies outside of bankruptcy court. That’s what Harrah’s has done with certain bondholders.
So the question playing out in Las Vegas boardrooms is how much control casino owners should relinquish to lenders through bankruptcy protection to save their companies — or whether they can survive without giving up any control.
What makes anyone think next year will be better for Las Vegas. There will be more rooms so lower occupancy rates. The fuel costs keep rising with every increase the economy tries to start, and the First Mouth is still making his headlines berating anyone theat is trying to succeed.
Companies make plans for meeting and conventions years in advance. Las Vegas is currently a dirty word for event planners and companies are signing contracts in Orlando, San Fransisco, and Chicago. Las Vegas properties will be hard hit for a decade or longer.
Thank you harry Ried and Mr. Obama...you have done us in instead of done us proud.
Casino can't pay debt? Bankruptcy!
Gambler cannot pay marker? Arrested!
Neiman1,You just never stop.This economy is the worst since the 30's, and Bush is responsible. I remeber when gas was headed to $4.00 agallon you were predicting the earth would stop spinning. You were wrong. The price of gas is supply and demand driven.
The only mouth berating anyone is the idiot Rush. Companies are taking their conventions where rooms are not $1000.00 a night like it was not so long ago in Vegas. And thanks to Morgan Stanley and Wells Fargo abusing TARP money smart companies are avoiding sin city.
Thanks Bandar Bush for telling America the economy was fine when in fact it was headed for a train wreck. Thanks for giving all of the TARP money away without any oversight.
Once again Neiman1 think before you make ridiculous statements.
Vegas has been one of the cheapest places to have a convention for a LONG time, not just rencently, where does this $1000 a room come from. There are very few rooms which have ever been $1000 a night. Convention room averages have been between $120-$600 a night; with the majority of them being in the $200 range.
Look up rates in the other big cities which are the big convention players; Chicago, Orlando and San Fransico and the room rates at the convention hotels. Las Vegas has ranked either cheapest or 2nd cheapest every year...
Neiman might be a little jaded Republican Wingnut, but the Democrat wingnuts are just as bad. The current economic enviornment wasn't the result of any one person, it was the result of the past 15 years of greed since the last large economic downturn (911 downturn was artificial), our lack of controlling the recources we use, bad decisions by our lending institutions and the hubris of certain people who have had a lot of power.
homer, rooms for $1000 a night on the strip? Blah-blah-blah Rush blah-blah Bush. Enjoy your poverty.
Gaming companies that can't pay their debts should be forced into a sale or bankruptcy by the Nevada gaming Commission
The irony is that the cost of typical hotel rooms (not suites, but hotel rooms) in San Francisco, Chicago and even Orlando when a convention is in town would make Vegas blush. For several years, Vegas's comparably low convention and room rates have been a selling point for businesses. Since 2005, I have consistently stayed at Bellagio for between $150 and $200 per night...and I would be shocked to find a comparable room in other big cities for that rate. The irony is also thick when considering that the current adminstration's scolding of companies that had scheduled conventions in Vegas resulted in many of them moving their conventions to cities of allegedly better repute; however they paid MORE money to do so than if they had just stayed in Vegas. As a taxpayer (and there are fewer of us with each passing year) that is the real insult here.
gqbossing is right!! It's not the fault of any political party. Unfortunately, the casinos got a little full of themselves and overbet their hands (no pun intended).
And never mind Neiman1, he does this every single day. It gives him something to do and keeps him out of trouble which can't be all bad.
rusty, You obviously don't pay attention to the facts either,just over a year ago suites at Bellagio and Mandalay Bay were over $1000.00 a night. If you could afford to stay their or better yet walk in the place you would know.Bush take nit wits like rusty to Crawford and force feed them some more of your lies, that is if you can complete a sentence without Rove their with you. blah,blah,blah. Think and do some research before you make a fool of yourself.
Rusty:Bush the village idiot who knew he had one thing going for him and that was the Bush trust fund, other than that everyone who knew him wondered how he could find his way home or remember his phone number .Even with all of daddys money he was denied entrance to law school at Texas.Daddys money did help when he failed the test for flight school with the Texas National Guard, he was admitted anyway. After he was admitted no one could find him, he was drunk and high in Alabama. Quite some hero you have there rusty.Speaks volumes about you.
geenab65 Your point is well taken and I agree. Las vegas has always thought they could survive any crisis and when they priced themselves out of the market on top of the worst economy since the thirties the ugly truth came the haunt them. I just gets old when these nit wits keep coming with their profound stupidity about Obama when he has been in office less than four months)and Harry Reid. Not once on the eight years of the worst president in history did they or have they put the blame where it belongs. It is obvious these goof balls don't read or research anything and Rush gives then their talking points.
When it comes to Neiman, he has something to do and that is ride his skateboard after mommy feeds him.
Homer, quit surfing and get back to the classifieds! Checks from Obama won't last forever!
Is Homer the village idiot around these here parts?
As a taxpayer it insults me that anyone receiving ANY bailout money go ANYWHERE for a 'convention' - it also insults me when people receiving welfare buy filet mignon instead of buying tons of cheap hamburger meat and stretching those food dollars. Why should any company use bailout money to pay ANY price for a hotel room ANYWHERE when they could just as easily pick up a telephone - it's called TELE-CONFERENCE and unless they're using their own company funds to pay for their little jaunts I suggest they start dialing.
lol. you can try and use bush as the scapegoat, but the root of the problems sits between the keyboard and the chair. its the general American public. spending money they don't have (thank you credit cards), and buying houses they couldn't afford. economy would have tanked with or without bush
rusty57 As an after thought are you aware the Mirage and Bellagio have chateau's that rent for more than $2000.00 a night? I did not think so.
jaesan In 2002 George Bush encouraged Wall Street and the Federal Governmant to develop products that made housing more afforable for those who could not afford a home and in 2004 The Ferderal Reserve Chairman asked Wall Street to find markets for mortgages that were tailored to the lower income brackets. Do your homework.
goingbust Well ol' buddy around these here parts people who write and talk like ignorant hillbillies are customarily referred to as ignorant. Now why don't you go back to your fishin'hole where you came from and don't speak until you know something. Good buddy
rusty57 The only check I got was from your hero Bush and it did not help. Now you need to get a job so you can make investments and understand how it all works until then ride your skate board with neiman and go fishing with your good buddy goinbust. Have you ever stayed at the Mirage or Bellagio,had dinner at any of the retaurants they offfer? You must leave the trailer park first, get a job and then you can experience these things.
rusty and goinbust I realized your not available now the movie O Brother Where Aren't Thou is on and you must catch your kin folk on the tube.
As a Reagan Republican, the BLAME for the mess that we are currently in lays squarely on the shoulders of the Bush White House and the Republicans in Congress.
A senseless and COSTLY war that alienated our allies in the fight against global terrorism. The housing bubble collapse. The greed of Wall Street. The failure to capture Bin Laden.
Remember it was the Congressional Republicans who thought that impeaching Clinton was actually good for our Country.
End of story.
Now it's time to move forward from the brink of another depression and rebuild this Country.
The Republican Party needs to get back to "less government" including butting out of our personal lives.
nkls3713 Well put. It seems as though this sight attracts non intellectuals who when confronted chose to act like juveniles. There is enough blame to go around for both parties, it seems the Rush and Fox News junkies refuse to read or research but take their talking points from idiots who encourage the downfall of America. It would be safe to say most of these people do not have jobs,own homes,invest,or have a clue about life other than what television gives them. You are so correct this is not the Republican Party of our grandfathers and the party that gave me reason to vote for Reagan. He was not the greatest but was far smarter than those that followed him.
homer, get your facts straight. that was actually started by Clinton. Bush and the Republicans helped by loosening the rules even more so.