Daily Memo: Gaming:

Downturn lights a path to casino control

Rather than buy into companies, investors mull buying up debt — with chance of calling shots

Monday, Sept. 28, 2009 | 2 a.m.

Headlines from the Vegas gaming industry

In reversal, Fontainebleau lenders suggest liquidation (9-25-2009)
Harrah's adjusts debt plan announced earlier this week (9-24-2009)
Gaming giants didn't go bankrupt, so stock prices rose (9-21-2009)
Penn National surfaces as possible Fontainebleau buyer (9-18-2009)
MGM expands debt-placement deal with $475 million in notes (9-18-2009)

One man’s troubled casino is another man’s potential buying spree.

When times were good, private equity firms were knocking down doors to invest in Las Vegas casinos, which were believed to be resistant to downturns and consistent profit generators.

Stung by the recession, some of these same firms — alongside investment funds recently organized to buy troubled casinos and other commercial properties — are now sniffing out casinos, looking to buy them for cents on the dollar.

One example is Apollo Management, which has looked at the Fontainebleau, which is in bankruptcy court, and cash-strapped Cosmopolitan, according to Las Vegas executives who did not want to be identified so as not to reveal private discussions that, if revealed, could torpedo a company’s takeover plans.

With bankruptcy looming for some casinos, opportunists have a stealthier path to casino ownership that rarely presented itself before the recession, when casinos mostly failed on bad execution rather than for economic reasons.

Rather than buying shares or equity, some investors are seeking to buy chunks of casino debt, which has ballooned in the recession as companies have less money to make payments.

Equity often becomes worthless in bankruptcy, as the debt is more than a company’s worth. Ownership often transfers to debtors who are first in line to get paid. Because such transactions are private, investors can secretly accumulate a significant chunk of a company’s debt by buying it from the original lenders, then reveal their stake before or after a company enters bankruptcy. Major debt holders have significant leverage over other creditors in bankruptcy because decisions are made mostly by majority vote.

With this in mind, Harrah’s recently bought a chunk of debt in the troubled Planet Hollywood resort, which sits next to a cluster of Harrah’s-owned properties at the center of the Strip and will connect by overhead bridge to the $8.5 billion CityCenter resort complex across the street, which opens in December.

Analysts say the former Aladdin, which emerged from bankruptcy in 2004 and was re-branded as Planet Hollywood in 2007 after a top-down remodeling effort, might make a plum asset for Harrah’s and its mostly older properties in Las Vegas. Harrah’s has its own financial troubles and has so far avoided bankruptcy by reducing debt by billions of dollars through a combination of buying back its own debt on the cheap and refinancing other loans. Yet analysts say Apollo, which bought Harrah’s for $30.7 billion in January 2008, as the country slipped into a recession, may be interested in plowing more cash into Harrah’s to help it weather the economy.

An Apollo spokesman declined to comment.

Recently, debt investors have eyed multiple casinos in various stages of the restructuring process, including Planet Hollywood, the Riviera, Hooters and Green Valley Ranch Station Casino. The Riviera defaulted on its debt in February after not making interest payments, Hooters similarly defaulted in April and Planet Hollywood defaulted in August. Green Valley Ranch is current on its debt, though earnings have plummeted in the downturn, straining the property’s finances.

Investor debt purchases and greater availability of credit have recently pushed up prices for some bond and bank debt, which trades as stocks do. The Riviera’s debt has risen 11 percent in the past month, Green Valley’s debt is up 5 percent and Hooters’ is unchanged, according to data from Wells Fargo Securities. Planet Hollywood’s bank debt, held by institutions rather than individual investors, rarely trades at all. Even after increases, the debt of these companies still trades at depressed levels.

Some investors believe in the long-term viability of the Las Vegas casino industry, though at prices that make foreclosed homes look expensive.

Private equity firm and gaming newcomer Onex Corp. began accumulating more than $200 million of the Tropicana’s senior debt last year, becoming the sole equity owner after the hotel — worth well over $1 billion a few years ago — emerged from bankruptcy in July. In June, a group of creditors controlled by Carl Icahn received bankruptcy court approval to buy the Tropicana casino in Atlantic City after buying up $200 million of the hotel’s debt. Regulators who forced the property’s sale expected the Atlantic City Tropicana to fetch $1 billion at auction a year and a half ago.

Private equity funds, replacing traditional lenders who are leery about investing in casinos in the recession, seek bargains they can sell in the short term or operate profitably longer-term, said Las Vegas gaming attorney Frank Schreck, who crafted regulations paving the way for Wall Street investment in casinos.

They’re more willing to invest now versus a year ago, Schreck said, because they know what to expect.

“Everyone knows where we are in the economy right now and that there’s no bright light at the end of the tunnel.”

Discussion: 10 comments so far…

By BorisR

9/28/09 at 3:38 a.m.

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I like these types of investors. Respect to them.They are taking a shot at something that could maybe turn around again in 5 years or so from now. It's longterm investment in something with potential. Technically, just the opposite from day trading on Wall Street.
By doubledown_deadender

9/28/09 at 7:29 a.m.

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This is like buying a famous race horse with Colic. The outward appearence seems ok...but the horse has seen it's best days.
By BorisR

9/28/09 at 7:46 a.m.

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not 100 per cent with you on that one, doubledown_Deadender

The Rampart Casino has been bought out 2x until it became profitable. I just don't know how these Australian guys are doing right now. The East Side Cannery may have been a little bit too much of greed and now the financial situation gets a bit tricky. Anyway, The initial company that opened up the Rampart Casino ("Casino at Summerlin") went bust under the debt load. The next casino company bought it out but shortly after found a new buyer. The casino became so affordable for the new owner that it can make it with less than the previous owners would have needed.
These buy-out companies are taking risks into consideration. Once the economy bounces back up, they will be flying high. Otherwise they go bust and become victims of buy-out corporations themselves.
By doubledown_deadender

9/28/09 at 8:37 a.m.

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Boris,

Times have changed...big-time excess capacity, a dogged recession, unemployment and Macau siphoning off 70% of the Asians.

I sadly believe the recovery for Vegas, (recovery that will absorb all the new excess capacity) is 5-7 years out. All those new, empty beds and playerless slot machines sitting idle.

If these investors are already in for 30% or more, then it makes sense to go for 51%...if the price is right and they don't make the mistake of compounding debt loads on the hope of a quick recovery.
By davidwayneosedach

9/28/09 at 9:09 a.m.

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There are great bargains to be had by the prudent investor with money. I will be happy to buy and own a Las Vegas condo.
By homer

9/28/09 at 9:39 a.m.

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Boris The hotel at the Rampart casino is owned by someone else who leases the hotel to the Marriot. The casino is leased as well by the Cannery Corp. The guys from Australia ( the Packer family) have backed out and left retainer money on the table for their interest in the Rampart Casino as well as many other interests in Las Vegas. Someone finally got the Packer children by the kneck and told them they were in over their heads and they needed to go back to Australia. The head of the Packer family had recently passed away and his children were in over their heads in Nevada.Someday things will improve for gaming but never like before.
By LasVegas2009

9/28/09 at 9:43 a.m.

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davidwayneosedach: Why buy a condo when you can get a house for under$50,000? Without the $150 a month HOA that comes with the small condo. Check this on out http://www.realtor.com/realestateandhome...

There are thousands of these in Vegas houses less than five years old less than $50,000 selling for around $40,000. Most from 1200-1500 sqft.

With all these why would anyone buy a condo?
By denro

9/28/09 at 10:13 a.m.

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Las Vegas 2009...location, views and amenities.
By BorisR

9/28/09 at 10:42 a.m.

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I just know that I almost had my job in Vegas when the Rampart Casino was about to be run under Swiss Casinos. However, it was a bit too early for the Rampart Casino to make enough cash and the debt load was extreme. Summerlin was still deserted with a few golf courses under construction and a lot of sand wherever you could see. 10 years later, everything is so great in Summerlin. Too bad, I could not make it to Vegas. They told me to stay where I am , in Switzerland :(
By muddapucker

9/29/09 at 12:41 p.m.

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All of this puts me in mind of the old joke...

If you are behind 6 mos on a $50,000 loan from the bank, you have a problem.

If you are behind 6 mos on a $5M loan, the bank has a problem.