Las Vegas Sun

April 17, 2014

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M Resort’s debt purchase befuddles bidders

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Justin M. Bowen

Penn National Gaming recently purchased $860 million in M Resort debt for $230.5 million.

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Anthony Marnell III

Most financially broken businesses try to resolve their predicaments with foreclosure auctions and bankruptcy sales — public events with starting bids and published procedures.

In the alternative, equity owners of a drowning business may transfer control of their assets to a third party by selling bonds or the company’s bank loans. The buyers become the new debtholders with a claim to the company.

And then there was the recent $230.5 million sale of M Resort’s debt, worth $860 million on paper, to Penn National Gaming — financial wheeling and dealing that seemed to fall into a category of its own.

Bidders contacted by the Sun say they are unsure how to describe the process by which M’s lender, Lloyds Banking Group, solicited bids for its portion of the debt. Potential buyers submitted bids and then resubmitted them — in some cases, multiple times — without knowing what others were offering. For some bidders, the process felt like they were fumbling in the dark, at risk of being aced out by the competition.

M Resort CEO Anthony Marnell III called the process “incredibly frustrating for everyone involved.”

“The process went on and on and on,” he said. “At times it wasn’t very clear what was going on.”

(Marnell’s bid to buy the debt of his casino, backed by private-equity firm Leonard Green & Partners, was unsuccessful.)

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If Harrah’s Entertainment sells the Rio to raise cash, the company must sell it for at least $300 million. And if it sells for less than $425 million, the company must first use the proceeds to pay down a mortgage loan on the Rio.

The stipulations are part of negotiations with lenders who agreed to more favorable loan terms, including extending the maturity of a loan by up to two years and mandatory offers to repurchase loans at discounted prices, thus forgiving millions in debt.

The mortgage loan is part of a financing package used by private equity firms to achieve a leveraged buyout of the company in January 2008. Called commercial mortgage-backed securities, the loan was a form of cheap capital when real estate was booming and gives lenders the right to control a property if it defaults on debt payments. The downside for borrowers is that there are typically restrictions on the sale of properties included in the loan, giving lenders more security for their investment, said analyst Michael Paladino, senior director of gaming, lodging and leisure for bond rating agency Fitch Ratings.

Whether Harrah’s will sell the Rio isn’t clear. Some analysts suspect investors are making lowball bids while the economy is still depressed. Without the benefit of Harrah’s Total Rewards marketing program or its iconic World Series of Poker tournament, the resort may not earn as much under a new owner.

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Recession-battered casino workers who complain that their tips are down significantly can take consolation that the Internal Revenue Service, with little pressure from the industry, has lowered the amount they are taxed on their tip income.

Since the recession, the majority of Las Vegas casino workers who participate in the IRS’ voluntary tip compliance program are paying about 30 percent less in taxes on their tips.

Under the program, the IRS taxes tipped workers based on predetermined estimates of tips earned at particular hotels for certain shifts and jobs. It’s an immensely complex system that has nevertheless been a boon for both the IRS and workers. In return for participating in the voluntary program, casino workers don’t have to report tip earnings based on detailed workbook documentation of their daily tips. Rather than relying on workers to report tips that might go uncollected, the IRS receives millions in guaranteed taxes on tips.

At least once a year, casino executives and Culinary Union officials meet with the IRS to discuss the tip rates. They reduced rates in 2008 by about 20 to 25 percent and further lowered rates in 2009 by another 5 percent or so.

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  1. Penn National has been looking for an "in" with the Vegas market, and they found it. They now take over ownership of a very nice casino at an attractive price point.

    Though it's a bargain at that price, they still face some challenges. The casino is way too big for it's location. It's too far off the strip to really be a major player with tourism, and drawing locals is also an issue.

    The casino has nothing but uninhabitated land to it's south, can draw from the east and west to some degree, but the vast amount of potential guests to the north have multiple casinos that would be much more convenient to frequent.

    It's kind of like Station's black eye, Aliante Station (know to locals as "Ali-empty"). It doesn't take a doctorate in business to understand a simple concept of "location, location, location". Don't build a giant anything on the outskirts of town and expect that people will simply come. There are too many choice in Las Vegas. Convenience reigns supreme.

    The M bit off more than it can chew in it's construction. The Marnell family should have built a casino half its size which would have reduced labor costs, utility costs, dram shop costs, and any other number of expenses associated with a property as vast as it is.

    Start with a manageable property, then expand if the market can sustain the expansion. I don't feel sorry for the Marnell's, because they continued forging ahead even though the market was collapsing.

    Oh, one final thought. The name is stupid.