Starwood Capital involved in takeover of bankrupt Riviera

By Steve Green

Tuesday, July 13, 2010 | 6:13 p.m.

Deep-pocketed Starwood Capital Group is participating in the takeover of the Riviera hotel-casino on the Las Vegas Strip and its sister casino in Colorado, an attorney confirmed Tuesday.

Riviera Holdings Corp., owner of both properties, filed for Chapter 11 bankruptcy reorganization Monday in Las Vegas and said at that time its reorganization plan was supported by holders of more than two-thirds of its $247.7 million in debt under its June 2007 Senior Credit Facility.

Those debt holders include Starwood Capital, Gerald Gordon, an attorney with the Las Vegas law firm Gordon Silver representing Riviera Holdings, said Tuesday.

Starwood Capital is headed by longtime hotel industry executive Barry Sternlicht, known in Las Vegas for running Caesars World during the late 1990s.

Caesars World, including Caesars Palace, was sold in 1999 to Park Place Entertainment Corp., which was later taken over by Harrah’s Entertainment Inc.

Sternlicht, known for developing the Heavenly Bed at Westin Hotels, hasn’t yet commented publicly on the Riviera deal.

He’s known as an entrepreneurial real estate investor, most recently raising $3 billion during the last two years for investments including acquiring the real estate loan portfolio of the failed Corus Bancshares. That portfolio includes troubled Las Vegas condominium projects One Las Vegas and Streamline Tower.

Bloomberg News reported in March that Sternlicht had said Starwood Capital and other investors had bought control of Riviera’s first mortgage for about 50 cents on the dollar and was leading creditors negotiating a pre-packaged bankruptcy.

Gordon said Tuesday that the debt holders, which include Starwood and other investors, had agreed to exchange their debt for a controlling equity stake in the Riviera and to provide $10 million to $30 million in financing to the company.

Terms of the deal call for some $220 million in debt owed by the Riviera to be extinguished, leaving it with about $50 million in debt, Gordon said.

Besides the $247.7 million owed under the credit facility, the company owes some $27.9 million under a securities hedging contract.

Riviera has been deferring needed maintenance to conserve cash, and its operations have been largely unaffected by the bankruptcy filing.

"The company will continue to operate," Gordon said.

"Through bankruptcy, the company anticipates that it will be able to restructure its indebtedness, provide for investment of new capital into the company and emerge in an improved financial and operational position," Riviera said in a statement Tuesday.

Stockholders will likely see no return on their investment in Riviera, the company noted.

"The company's management strongly believes that any recovery for equity holders in the Chapter 11 process is highly unlikely, and under the terms of the restructuring and lock-up letter agreement (with debt holders), the equity holders' interests in the company will be cancelled and will receive no distributions," Riviera said in its statement.

"By agreeing with our secured lenders in advance, we will be able to proceed with an expeditious restructuring through bankruptcy which will provide us with a viable capital structure, as well as additional financing," said Tullio Marchionne, secretary and general counsel of the company.

"We, like many others in the gaming industry, have been affected by the current economy. However, both our Las Vegas and Black Hawk properties are generating positive free cash flow and this, combined with our cash balances, will help ensure that we continue to pay all our operating costs on a timely basis and fund maintenance capital expenditures. There will be no effect on our employees, vendors, and most importantly, our customers.

"Furthermore, our ability to reach a mutual agreement with our lenders as to the restructuring provides us with a great advantage that most debtors in bankruptcy are not so fortunate to have. It is our expectation that the Chapter 11 cases will proceed before the Bankruptcy Court in a prompt manner. We believe that by restructuring our debt in coordination with our lenders we will emerge with a capital structure which will enable the company not only to survive, but to grow as the economy recovers," Marchionne said in the statement.

The Riviera lost $4.5 million on revenue of $30.8 million in the first quarter.

In court papers, attorneys for the company said the 2,075-room Riviera Las Vegas has been hurt by declines in convention attendance to Las Vegas and the property’s increasing isolation, worsened by the shutdown of construction at the adjacent Fontainebleau resort as well as the nearby Echelon resort.

"One of the primary challenges Riviera Las Vegas faces is its increasing isolation given the recent changes along the north end of the Strip. Only a few years ago, Riviera Las Vegas was immediately surrounded by established and legendary casino properties such as the Stardust, the New Frontier and Westward Ho. During the recent economic boom, those properties and several other North Strip hotel and casino properties were sold and demolished to make way for new high-end resorts. However, as the economy rapidly declined, these anticipated new projects either halted construction or failed to start altogether," a Riviera bankruptcy filing said.

With the only big operating properties nearby being Circus Circus, the Sahara, the Stratosphere and the Las Vegas Hilton, the Riviera has seen steep declines in walk-in traffic.

"Riviera Las Vegas has always relied on walk-in traffic by capitalizing on its Strip location, and its close proximity to several major casino properties as well as the Las Vegas Convention Center and several timeshare and condominium projects. Not only has walk-in traffic diminished due to the reduction in casinos and other attractions along the north end of the Strip, but any remaining foot traffic near Riviera Las Vegas is further reduced due to inaccessibility to the property due to construction hazards at nearby properties, streets or walkways," Riviera’s filing said.

Despite these challenges, the company remains cash-flow positive – meaning that slashing its debt through the bankruptcy process may enable Riviera Holdings to ride out the recession.