Company ownership idea seeks to spur investment

By Liz Benston

Sunday, May 3, 2009 | 2 a.m.

A proposal to allow institutional investors to own up to 25 percent of a Nevada gaming company without undergoing background checks now required for a license is aimed at encouraging investment in Nevada casinos at an especially difficult time.

The proposal, which would increase the threshold from 15 percent, comes as banks and bondholders are considering takeovers of gaming companies in Chapter 11 bankruptcy reorganization, and could pave the way for additional firms to come to the table as passive investors.

The 1992 regulation waiving background checks for institutions owning up to 15 percent of a company’s voting securities was adopted to accommodate firms that would not have otherwise invested in Nevada casinos.

Las Vegas attorney Frank Schreck, whose proposal must be approved by the Nevada Gaming Commission, is responsible for engineering the licensing procedures enabling private equity firms to invest in casino giants by requiring licensing of only a few individuals with voting securities and creating a class of nonvoting shares held by the vast majority of the firm’s investors. Those deals turned out to be duds in this economy but have created a road map for opportunists willing to step in and buy casinos more cheaply.

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Developers of the $3 billion Fontainebleau Las Vegas, which filed suit last week against a group of banks for terminating an $800 million loan before construction is complete, have the public’s sympathy. Amid high unemployment and widespread layoffs, the resort would employ more than 6,000 full-time in addition to the 5,000 construction workers needed to finish the project — generating an estimated $73 million in taxes and fees.

“It is undeniable that the interest of the public is best served by the completion of the project,” the lawsuit states. Should the project shut down for lack of money, “there would be a profound impact on the community and the already reeling Las Vegas economy.”

Senate Majority Leader Harry Reid and Rep. Shelley Berkley have rushed to Fontainebleau’s defense, noting that certain banks have received billions of dollars in federal aid as part of the Troubled Assets Relief Program to jump-start lending.

However, banks have been allowed to use the federal money to clean up their balance sheets and buy up bad loans rather than make new ones. Nor have TARP recipients been required to lend money to speculative projects, in Las Vegas or elsewhere.

Other than abiding by the loan agreement, Fontainebleau’s banks are ultimately responsible to their investors, not the Las Vegas economy or its residents.

Banks are now chastised for being too conservative — a quality they were criticized for lacking in the first place.

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Ever watchful of the big picture, Steve Wynn has two, sometimes competing, interests: Ensuring the long-term health of the Las Vegas Strip and encouraging the breakup of giants MGM Mirage and Harrah’s Entertainment, which consolidated ownership of most of the Strip’s major casinos during the tourism boom and could now end up selling properties to pay down ballooning debts. The trick is weakening the giants enough to encourage competition without threatening the symbiotic dynamic along Las Vegas Boulevard, where the success of individual properties — at least in good times — boosts their neighbors’ prospects.

Wynn Resorts recently negotiated more breathing room from its banks to increase its leverage, should earnings fall further this year and next, in exchange for a higher interest rate on its debt and other terms. The company has at least $1.2 billion in cash atop $4.5 billion in debts — a comfortable position relative to its Strip competitors — as well as stock trading at a respectable $40 per share.

But buying a Strip casino — such as Bellagio, which Wynn sold as part of MGM’s takeover of Wynn’s Mirage Resorts in 2000 — is a major commitment, especially in uncertain times. Observers say Wynn, who brought Wall Street to Las Vegas with the junk bond financing for the Mirage in the 1980s, could play a safer role as matchmaker, encouraging groups of investors to pounce on assets, with or without an ownership stake.