Herbst Gaming’s troubles deepening

By Liz Benston

Wednesday, April 2, 2008 | 1:30 p.m.

Last month Herbst said it had hired Goldman Sachs to develop a plan to appease lenders and keep the company, which has suffered in the economic slowdown, out of bankruptcy. Herbst, closely monitoring its

sliding performance, had already received a waiver to keep lenders at bay.

But that changed when Herbst's auditors issued an opinion, based on a gloomy outlook of the company's ability to repay the loans, that could allow lenders to demand immediate repayment on $1.2 billion worth of loans.

Herbst's annual report, filed Monday, explains that the auditor's opinion has triggered a technical default on the company's loans, requiring Herbst to get a waiver from lenders. To avoid bankruptcy, Herbst has to come up with a recapitalization plan, which will be difficult given that banks have tightened lending.

Herbst's purchase of three Primm casinos at the California border from MGM Mirage last year seemed like a good move because MGM, which hadn't invested much in the properties over the years, wanted to sell and Herbst wanted to diversify.

Before the company bought the casinos for $400 million last year, Herbst made most of its money operating slot machines at gas stations and other small slot locations, a business that was on the decline after a 2006 smoking ban exempting casinos and slot bars without food service.

But nobody would have expected the depth of the economic slowdown, which has hurt business at the properties at a time when the company needed to pay down debt from the deal. With the smoking ban and the mortgage crisis affecting both Las Vegas and drive-in traffic from California, it's a double whammy for Herbst.

Today, the future of one of Nevada's premier gaming families appears unknown. It's also unknown when the lending market and the broader economy will turn around, which is the same problem Herbst faced when, amid surging optimism about the Las Vegas economy, the company snapped up the Primm casinos a year ago.