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October 24, 2014

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Station Casinos details lease arrangement, rejection of Boyd

Company responds to minority lenders’ request for investigation of finances

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Station Casinos Inc. of Las Vegas is fighting a motion that an examiner be appointed to investigate its financial operations.

The company on Friday filed a response in U.S. Bankruptcy Court to a motion by a group of minority lenders that an examiner with wide-ranging investigatory authority be appointed.

The minority lenders early this month charged creditors are being harmed by what they called conflicts of interest in the Station corporate structure; payments the company makes to itself to lease four hotel-casinos; and the company's alleged failure to seriously entertain an offer by Boyd Gaming Corp. to buy certain Station assets.

Station, in its response, denied the conflict of interest allegations, said it's studying potential changes to the lease arrangement for the four casinos and offered details on why it rejected Boyd's offer.

The request for appointment of an examiner is likely to be discussed during a court hearing Wednesday, but court records show the minority lenders and Station are in disputes over discovery issues. That means the ruling on the motion for appointment of an examiner may be delayed until the discovery controversies are resolved.

Also likely to be discussed Wednesday is a report filed last week by the Special Litigation Committee of Station's board of directors. The committee and its experts studied the 2007 deal in which members of Station's founding Fertitta family and investment company Colony Capital of Los Angeles took the company private.

The committee found the transaction was not successful as the parties could not have anticipated the deep recession that has left Station unable to meet its debt obligations.

With $6.49 billion of debt and other liabilities and facing declining revenue as the recession eroded the locals gaming market -- Station revenue was down 21 percent year-to-year in the second quarter -- the company filed for bankruptcy protection July 28. Its hotel-casinos remain open.

The litigation committee said the terms of the going-private deal were fair at the time and that those terms would likely survive threatened legal challenges.

Another topic during Wednesday's hearing is Station's latest plan to spend cash during the bankruptcy process.

On the motion for appointment of an examiner, attorneys for Station said in Friday's filing that the complaining lenders:

--Appear to hold less than 30 percent of the debt in a $900 million loan agreement.

--Are fighting with other lenders that, as a majority, have approved Station's post-bankruptcy spending plans -- plans objected to by the minority lenders.

--Are critical of "the very capital structure into which they themselves chose to invest in."

Under that structure, Station executives oversee various corporate entities that are subject to three separate loan agreements with competing interests, the lenders complained.

Station, however, said its management decisions are already scrutinized by the court and aren't hurting certain creditors to benefit others.

"The motion simply reveals that the minority lenders are embroiled in intercreditor disputes, not the victims of any conflicts of interest allegedly residing with the debtors," Station said in its filing.

The lease at issue involves some $250 million Station pays annually to lease Red Rock Resort, Sunset Station, Boulder Station and Palace Station. Much of the rental money is earmarked toward payments on $2.475 billion in debt encumbering the hotel-casinos. The lenders have complained the rental and mortgage payments are excessive, particularly given the downturn in the economy that has reduced the value of the properties. They want the deal re-worked so more money is available to other creditors.

But Station said Friday: "The debtors and their advisors have devoted, and continue to devote, significant effort and resources to arriving at an appropriate restructuring of the master lease."

Station said a valuation and market rent study of the properties is under way along with a legal review of potential lease-rejection damage claims.

"Everything that the minority lenders want the examiner to do – review and analysis of all options with respect to the master lease, review and analysis of how the debtors are deploying cash collateral, review and analysis of the amount and propriety of professional fee payments – is already being done by the debtors in the exercise of their fiduciary duties and under the watchful eyes of this court, the ... lender groups, the Official Committee of Unsecured Creditors and all of the other interested parties in these cases, including the minority lenders themselves. An examiner would simply not add any value to this already highly-scrutinized situation," the company said in its filing.

The minority lenders have also complained Station hurt creditors by failing to seriously entertain the sale of some properties to Boyd Gaming Corp. of Las Vegas, which could have generated cash to cover some creditors' claims.

But Station, in its filing Friday, said "Due consideration was given to Boyd and will be given to any other bona fide offers."

Station said that prior to Boyd's formal "indication of interest" on Feb. 23 of this year, a Station executive had met informally with Boyd management at Boyd's request "at which time the Boyd representatives expressed their general interest in acquiring one or two of the debtors' properties on a consensual basis."

The company said Boyd's offer was rejected after evaluations that included discussions with legal and financial advisors as well as certain creditors.

Station also noted its belief that before and after the Boyd offer, "Boyd communicated directly with a number of (Station) creditors about its interest in acquiring certain assets."

Such contact could have caused problems for Station with the creditors, since Station at the time was trying to gain lenders' consent for debt concessions that were needed under a plan for a pre-packaged bankruptcy filing that would have included commitments of additional capital from the Fertittas and Colony.

That pre-packaged plan did not happen as creditors couldn't agree among themselves on concessions, and Station filed for a regular Chapter 11 reorganization.

Station said its "OpCo" operating company "continues to believe that a comprehensive debt-restructuring plan is in the best interest of the debtors' estate, rather than pursuit of a distressed-sale transaction under the present circumstances with a primary competitor such as Boyd."

"Thus, far from ignoring its duty to explore a potential transaction with Boyd, OpCo did what it was supposed to do as a publicly reporting company: it carefully assessed Boyd’s non-binding, non-specific, highly conditional expression of interest, responded appropriately and filed its response with the Securities Exchange Commission (on) March 3."

The minority lenders seeking the examination of Station, calling themselves the Independent Lenders to Station Casinos, include Bank of Hawaii, BNB Paribas, First Tennessee Bank, General Electric Capital Corp., Genesis CLO, Natixis, Castlerigg Master Investments Ltd., the Bank of Nova Scotia, Union Bank and U.S. Bank.

Also objecting to their motion for appointment of an examiner is the Official Committee of Unsecured Creditors, which said it's already investigating many of the minority lenders' complaints as well as the 2007, $5.7 billion going-private buyout deal.

"There is no justification for the breadth and scope of the relief sought by the independent lenders. Not only is it expensive and burdensome to the debtors and their estates, but it is also completely duplicative of matters within the mandate of the committee," the committee's filing said.

"The committee does not dispute the necessity of having a fiduciary of these (bankruptcy) estates pursue each and every one of the matters referenced in the examiner motion," the creditors said.

The creditors committee said the independent lenders' effort for appointment of an examiner appears to relate to dissatisfaction with Deutsche Bank, a key Station lender and administrator of multiple credit agreements.

"To the extent that the independent lenders have sought relief at issue here to bolster their negotiating position with Deutsche Bank or the debtors or both, the examiner motion has been brought for an improper purpose," the creditors said.

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