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September 2, 2014

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Station Casinos bondholders renew interest in suing over deal

Bondholders in the Station Casinos Inc. bankruptcy case have renewed their request that they be allowed to sue Station insiders over the 2007 deal that took the Las Vegas company private, saying developments in high-profile bankruptcy cases around the country have reinforced their legal arguments.

The bondholders, owed $2.5 billion, are likely to see their investments wiped out under Station's reorganization plan in which Station insiders and their lenders would maintain control of five hotel-casinos now valued at $1.8 billion while 11 more gaming properties would be auctioned off.

As the stalking horse bidder, the Station insiders and lenders are seeking to maintain control of those 11 properties as well with a stalking horse bid of $772 million.

These proposed transactions value the company at about $2.572 billion. Because of the recession, that's down sharply from the $8.8 billion valuation when Station was taken private in 2007, a number that included $3.4 billion in debt that was assumed or repaid.

Station maintains it was the deep recession, not the going-private transaction, that left it unable to meet debt obligations and pushed it into bankruptcy last year.

But the bondholders' attorneys on Thursday filed a proposed complaint in U.S. Bankruptcy Court for Nevada charging: "The leveraged buyout (LBO) transaction caused Station Casinos Inc.'s insolvency and left Station Casinos with unreasonably small capital, ultimately driving the company to bankruptcy, to the detriment of Station Casinos' many unsecured creditors and employees."

"The LBO transaction consisted of a complicated web of contracts and transfers of property ... to accomplish a massive payout to the improper benefit of the defendants," the proposed complaint says. "The defendants relied on many risky and untested financial structures in crafting the LBO transaction."

The proposed defendants include Station's lead secured lenders Deutsche Bank and JP Morgan Chase Bank, Station subsidiary FCP PropCo and current and former Station officers and directors Frank Fertitta III, Lorenzo Fertitta, Glenn Christenson, Richard Haskins, Scott Nielson, William Warner, Thomas Friel, Dr. James Nave, Blake Sartini and Delise Sartini.

The bondholders say the $90 per share buyout, in which Los Angeles investment company Colony Capital LLC gained control of Station, resulted in $4.2 billion being paid to former shareholders.

Their proposed complaint challenges a provision in the deal in which secured lenders Deutsche Bank and JP Morgan Chase provided a mortgage against four of Station's most valuable properties and other financing totaling $2.4 billion. Those four properties were spun off into a separate company and then leased by Station Casinos.

This "master lease" provision was arranged so Station could tap into the collateralized mortgage-backed securities market to provide a source of secured financing for Station Casinos "where traditional debt financing would have been in breach of Station's pre-existing debt covenants," the proposed complaint says.

"The design and implementation of the master lease transaction was done with the actual intent to hinder or delay payments to unsecured creditors and, in the case of the bank defendants, provided the bank defendants an unfair advantage over general unsecured creditors," the bondholders allege.

The proposed complaint says that while Colony obtained about a 75 percent ownership stake in Station, it obtained only 33 percent of the voting stock of the company. "Such an anomaly ... was intentional so as to hinder or delay payments that could otherwise be due to certain noteholders," the proposed complaint says.

The bondholders complained the deal was engineered even as Station's business had been declining since the second half of 2006 because of the economic slowdown, and that it encumbered the company with some $1.6 billion in additional debt.

"Various insiders clearly understood that the assumptions underlying Station Casinos' management's projections were way off, but, because of their personal monetary interest in seeing the LBO transaction successfully closed (with all the risks on the backs of unsecured creditors), they ignored all the warning signs," the proposed complaint says.

The bondholders complained individual insiders received hundreds of millions of dollars from the IPO thanks largely to stock options granted them prior to the buyout, while the bank defendants "profited handsomely by receiving tens of millions of dollars in fees" and obtaining liens on the four casino properties.

Their proposed suit seeks to recover in behalf of creditors alleged "fraudulent transfers" in the form of allegedly excessive cash paid to the insiders for their stock because of the buyout and allegedly excessive bank fees. The bondholders also want the master lease deal canceled so all creditors can benefit from the value of the four Las Vegas-area hotel-casinos it encumbers: Red Rock Resort, Sunset Station, Boulder Station and Palace Station.

Bankruptcy Judge Gregg Zive has yet to rule on the bondholders' request that they be allowed to sue over the LBO. He earlier this year rejected a similar request in the Herbst Gaming bankruptcy case. Like Station's attorneys, Herbst attorneys argued it was the recession rather than untimely acquisitions by Herbst Gaming during the economic boom that drove Herbst into bankruptcy.

But in Thursday's filing, Station's bondholders cited several other cases where unsecured creditors have made progress in recovering some of their investments. Like the Station case, these cases involved leveraged buyouts engineered during the economic boom.

They cited a case involving Mervyn's in which a judge found that "selling shareholders can be liable on a constructive fraudulent transfer theory" and other cases involving publishing and broadcasting giant Tribune Co. and lodging company Extended Stay Inc.

"In such cases, courts have either granted ... standing (to sue) to creditors' committees or appointed examiners to undertake in-depth investigations with respect to transactions that occurred in late 2006 or in 2007," the bondholders' filing said.

"The (bondholders) committee submits that there is a consistent pattern of courts permitting creditors' committees or court-appointed examiners to take hard looks at highly-leveraged transactions that occurred in the same time frame as the November 2007 LBO transaction that the committee is seeking to challenge here," the bondholders' filing said.

Station attorneys haven't yet responded to the latest filing by the bondholders, but they did file a response Thursday to related complaints about the disclosure statement to the company's reorganization plan.

Independent lenders, who in the past have said they are owed $244 million, last week complained that under the plan, Station insiders and others have arranged releases for themselves -- without adequate explanation -- so they can't be sued by the bankruptcy estate for actions that may have caused the bankruptcy.

The independent lenders have complained their loans are at risk because of the going-private deal and other actions including Station's repeated refusal to entertain a buyout offer from competitor Boyd Gaming Corp. of Las Vegas.

Wilmington Trust Co., trustee for holders of $1.4 billion in Station bonds, also complained the disclosure statement does not contain adequate information to permit creditors to make an informed decision about the plan.

Attorneys for Station, in their response Thursday, said they'll be filing a revised disclosure statement soon reflecting modifications and additional information in response to inquiries and feedback on the statement.

In some instances, Station's filing said, "the Independent Lenders' complaints are nothing more than what has become the Independent Lenders' recurring theme of trying to disrupt a reorganization process in which they refuse to participate in any constructive way."

The Station attorneys noted the issue of whether insiders should be sued has already been addressed by the company's Special Litigation Committee, which found the recession, not the going-private deal, caused the bankruptcy. The Station attorneys also argued the disclosure statement doesn't need to examine this issue in depth as it's already been argued repeatedly by the bondholders.

"The Independent Lenders cannot credibly argue that any additional disclosure that might be included in the disclosure statement with respect to those matters will have any bearing whatsoever on their decision to accept or reject the plan," Station's filing said.

Station attorneys noted the company in November 2008 and in February 2009 tried to avoid the current controversies with debt-exchange deals that would have resulted in a consensual prepackaged bankruptcy filing. Station and the various creditor groups couldn't come to agreement on a consensual reorganization, which has resulted in the current highly contentious situation.

Station has also noted that, despite the complaints of the Independent Lenders and the bondholders, its reorganization plans are supported by holders of a majority of the secured debt against its OpCo and PropCo subsidiaries that own the 16 casinos to be auctioned or transferred.

Station and its partner in two more hotel-casinos, Aliante Station and Green Valley Ranch, are trying to restructure their debt outside of the bankruptcy process. Station's partner in those properties is an affiliate of the Greenspun family, owner of the Las Vegas Sun.

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