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February 11, 2012

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Bondholders say Herbst overpaid in deals, fight to recover debt

By Steve Green (contact)

Wednesday, Nov. 18, 2009 | 4:15 p.m.

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Bondholders owed $362 million by Herbst Gaming aren't giving up on hopes of collecting some of that debt.

On Oct. 30, U.S. Bankruptcy Judge Gregg Zive in Reno orally confirmed Herbst's reorganization plan in which the $362 million in bond debt -- trading in September at a value of $329 million -- would be extinguished.

Under the plan, the company would be turned over to secured bank lenders owed another $860 million. The new company would also assume $350 million in debt.

But attorneys for HSBC Bank USA, as trustee for the bondholders, responded with an amended lawsuit this week charging that Herbst engaged in dubious acquisitions in 2007 and that, consequentially, secured lenders should share in the resulting losses.

Based on Herbst's current value, the bondholders are demanding in this week's lawsuit that they recover $153.7 million and that the secured lenders' recovery be reduced by $549 million.

The bondholders' arguments have previously been disputed by Herbst and the secured lenders, led by Wilmington Trust Co.

Zive, too, previously dismissed a similar lawsuit filed by the bondholders. He gave them until Monday to file an amended complaint, which they did.

Attorneys for HSBC argue in the amended lawsuit that because of a smoking ban and other factors affecting the Herbst casino and slot route businesses, the company was either insolvent or was rendered insolvent by the acquisitions announced in 2007 of the Sands Regent casino operations in Northern Nevada and of Primm Valley Resorts at the California-Nevada border on Interstate 15.

"Despite the debtors’ insolvency or marginal solvency and decline in its slot route business, the debtors entered into two transactions in 2007 which increased their debt load by approximately $549 million and left the debtors deeply insolvent," HSBC charges in the lawsuit.

Some $149 million under Herbst's bank credit facility was used to finance the Sands Regent transaction and another $400 million was used for the Primm deal.

The bondholders charge that Herbst overpaid in both deals, that both deals immediately resulted in losses and deepened Herbst's insolvency, making them "fraudulent transfers" under the bankruptcy code -- meaning the debt associated with the deals can be canceled.

"Under the terms of the bank debt guarantees, the Herbst subsidiaries have no liability for the approximately $549 million in debt incurred under the credit agreement for the 2007 acquisitions," the bondholders allege.

Herbst and Wilmington Trust, in previous court filings, have said it was the recession -- not poorly conceived acquisitions -- that caused the company to default on debt obligations and seek bankruptcy protection.

"By April 2007, debtors could not have reasonably foreseen the subsequent devastating effect of the economic downturn in the entire United States, and in particular, Southern California and Nevada," Herbst has said in court filings.

On Monday, Herbst reported net revenue in the third quarter of $168.7 million was down from $196.5 million in 2008's third quarter as the recession took its toll on its businesses.

Despite the decline in revenue, the company earned $385,000 in the quarter vs. a loss in 2008's third quarter of $22.4 million. A big factor in the turnaround was a $28.5 million reduction in quarterly interest costs because of its bankruptcy filed March 22.

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