Wednesday, Dec. 9, 1998 | 11:44 a.m.
Santa Fe Gaming Corp. of Las Vegas says a likely bankruptcy filing by the subsidiary set up to finance its Laughlin casino won't hinder operations at either of its two gaming properties.
The company also continues to plan for a new Henderson casino and is waiting for improved conditions in the bond market before trying to finance that project.
In a Securities and Exchange Commission filing issued last week, Santa Fe Gaming said its Pioneer Finance Corp. subsidiary will declare bankruptcy: "Pioneer will file for relief under Chapter 11 of the United States Bankruptcy Code."
But company officials are not saying when that will occur or whether Pioneer Finance will drag Santa Fe and its other subsidiaries into bankruptcy with it.
In an interview last week, Chris Lowden, Santa Fe's executive vice president of operations, said Pioneer Finance has agreed with creditors not to file for bankruptcy for at least 90 days. He declined to say exactly when Pioneer Finance will enter bankruptcy, or to discuss whether Santa Fe Gaming will also enter bankruptcy.
While Santa Fe's SEC filings seem to leave little doubt that Pioneer will enter bankruptcy, Ray Brown, a company spokesman, explained that Pioneer will only file for bankruptcy protection if forced by creditors.
Some company critics expect Pioneer creditors to demand payment soon.
Santa Fe Gaming guarantees the Pioneer Finance bonds.
However, Lowden said that when Pioneer Finance does enter bankruptcy, it will be a "pre-packaged" filing. A majority of the subsidiary's creditors have already agreed to the terms of its reorganization.
"The intent is not to harm any bondholders, but to make them whole," said Lowden.
Santa Fe Gaming owns the Santa Fe hotel-casino in northwest Las Vegas through its Santa Fe Hotel Inc. subsidiary, and the Pioneer hotel-casino in Laughlin through its Pioneer Hotel Inc. subsidiary. Santa Fe Gaming also owns land in Henderson and on the Las Vegas Strip through its Sahara Resorts subsidiary. Pioneer Finance Corp., a subsidiary of Sahara Resorts, was formed in 1988 specifically to finance Santa Fe Gamings' acquisition of the Pioneer hotel-casino.
Santa Fe bought the Pioneer for $120 million, which was raised through a 13.5 percent bond offering. The company has paid down about half of the bonds' principal, but missed a $60 million balloon payment that was due Dec. 1.
Anticipating earlier this year that it would be unable to make the balloon payment, Santa Fe tried to re-finance the debt, a move Lowden characterized as routine for gaming companies. However, he said, Santa Fe's timing was off.
"Normally, you just go and re-fi it," Lowden said. "Unfortunately, the markets sank. ... If I had been to the market two months earlier, we wouldn't be sitting here."
"This company leveraged up its balance sheet at a time when you could do that and then, unfortunately, times and conditions changed," said Dave Ehlers, chairman of Las Vegas Investment Advisors.
So Santa Fe turned to its plan "B," and asked Pioneer Finance's approximately 600 bondholders to either exchange their bonds for new bonds due in 2006, or to agree not to demand payment on the bonds for two years.
The exchange offer, which would have required 100 percent acceptance to succeed, failed when the company did not hear from nearly a quarter of the bondholders. But 76.4 percent of the bondholders did agree not to demand immediate payment of their bonds, and to accept new bonds due in 2006 if the company enters bankruptcy.
"The bondholders have agreed to stand still, essentially," said Lowden.
This pre-packaging of Pioneer Finance's bankruptcy ensures a quick, painless reorganization, said Lowden. Though 23.6 percent of the bondholders did not agree to the terms, Lowden says most either could not be found or did not reply. He expects the acceptance percentage to rise as last-minute"stragglers" return their ballots.
As part of its agreement with the consenting bondholders, Santa Fe paid $6.5 million, representing about 11 percent of the outstanding bonds. Pioneer Finance must now wait for 90 days from Nov. 30 to file for bankruptcy protection, or a bankruptcy court might declare that payment a preference payment. Preference payments -- defined in bankruptcy as payments made to selected creditors within 90 days of a bankruptcy filing to buy their support -- must be returned to the bankrupt party for distribution among all creditors.
While Lowden remains mum on whether Santa Fe Gaming and other of its subsidiaries will be drawn into Pioneer Finance's bankruptcy, SEC documents filed earlier this year indicate a "domino effect" is likely.
"If Pioneer Finance were to become a debtor in a case under the Bankruptcy Code," states an Oct. 23 Pioneer Finance filing, "it is likely that Pioneer Hotel Inc. and Santa Fe Gaming Corp. would file for relief under Chapter 11 of the Bankruptcy Code."
Because Santa Fe Gaming guarantees the debt of its other subsidiaries, a Santa Fe Gaming bankruptcy filing would accelerate those subsidiaries' debt payment schedules. So it is likely Santa Fe Hotel Inc. and Sahara Las Vegas Corp. would also file for bankruptcy, the SEC filing states.
Santa Fe spokesman Brown reiterated the companies will only file for bankruptcy if they fail to negotiate new payment terms with creditors.
Courtney Alexander, research director at the Culinary Union, said she doubts Pioneer will be able to hold off its creditors, and thinks the company may have to file before its self-imposed 90-day deadline. The Culinary is in contact with holders of about 15 percent of Pioneer Finance's bonds, and they want their money, said Alexander.
"They will be demanding payment," Alexander said. "I don't know that the company will be able to control the timing on this."
The Culinary is involved in a long-standing dispute with Santa Fe Gaming stemming from efforts to unionize the Pioneer and Santa Fe hotel-casinos. Last month, Alexander hosted a conference call to urge bondholders to reject the Santa Fe exchange and consent offers.
Lowden called the Culinary's efforts personal and unreasonable.
"The Culinary Union absolutely hates the Lowdens and hates the Pioneer," said Lowden. "To me, this whole Culinary push has always been about puttingthe Lowden family out of business."
Alexander denied that the dispute is personal.
"That's absurd, it's not personal at all," said Alexander. "It's about who will operate this company in the best interests of workers and in the best interests of investors."
Santa Fe Gaming is controlled by Chris Lowden's father, Paul, who owns a majority of its stock. Paul Lowden got his start in the gaming industry in 1973, when he bought into the Hacienda hotel-casino. He bought his partners out in 1977, and bought the Sahara hotel-casino in 1982.
In 1988, Paul Lowden added the Pioneer to the family's growing gaming holdings. The Santa Fe was built in 1991. The company has extensive plans for a hotel-casino across from Sunset Station in Henderson, and owns the Strip property that currently houses the Wet N Wild water park.
Both the Hacienda and Sahara were sold in 1995. Chris Lowden explained the company decided around that time it wanted to focus on locals gaming properties, as opposed to tourist-oriented resort gaming properties.
"Locals-based gaming was the direction this company wanted to go," said Lowden. "The philosophy of this business has changed quite a bit since 1995."
The company continues to plan for a Henderson property -- extensive drawings, maps and models grace the company's board room. Lowden said the future of the Henderson project is contingent more on the health of the bond markets than whether the company is in bankruptcy.
"We're still moving forward," said Lowden. "Even when markets were bad, its not a matter of getting money, it's a matter of the cost of getting the money."
In other words, money can always be borrowed, even by a company in bankruptcy, Lowden said. The question is how high of an interest rate the company is willing topay.
Santa Fe's Henderson plans call for a $130 million, 290-room hotel with a 73,000-square-foot casino, a 1,900-seat ice rink, and a 1,000-seat performing arts center.
Santa Fe has no plans for it's Strip parcel, currently leased to Wet N Wild, Lowden said. The parcel is most likely a "real estate play" for the company at this point, said Lowden, as Santa Fe has no desire to "swap hats" and become a tourist resort operator.
A Santa Fe bankruptcy filing would have no effect on the company's casino operations, Lowden said. Indeed, bankruptcy court protection is a device that protects troubled companies from foreclosure and other collection actions while allowing them to retain their holdings and continue their operations.
"It would have zero effect on the operations," said Lowden.
He noted the company continues to make interest payments on the debt, and reiterated the company's commitment to repaying all its debts. He disputed notions that Santa Fe is carrying too much debt.
"Santa Fe covers itself very well," said Lowden. "Operationally, balance sheet, everything, ... I would put this company up against any company of its size."
The core of Pioneer Finance's problem is really the downturn in the Laughlin market, Lowden said. The advent of Indian gaming and increased competition from other markets has led to a downturn in Laughlin, he said.
"The Laughlin market is not very good, although it seems to have stabilized in the last couple months," said Lowden. "The Indian reservations have all sprung up (with casinos) in its feeder markets."
"They paid a lot for the Pioneer in Laughlin, and the Laughlin market has been slow," said Andrew Susser, a corporate debt analyst with Salomon Smith Barney."Definitely, the problem with the company is Laughlin."
In the quarter that ended June 30, the latest for which Santa Fe has released figures, the Santa Fe hotel-casino posted an increase in cash flow -- earnings before interest, taxes, depreciation and amortization or EBITDA -- of $200,000, or 4 percent, from $5 million in the year-ago quarter to $5.2 million. Revenues at the Santa Fe increased 9 percent, from $16.8 million to $18.3 million.
The picture at the Pioneer was far different. The Laughlin resort posted a 5.1 percent decline in EBITDA, from $2.2 million in the 1997 quarter to $2.1 million. Revenues also fell, from $10.6 million to $10.4 million.
Despite Santa Fe Gaming's guarantee of the Pioneer debt, Lowden sees no reason for the parent company to step in and pay the bonds.
"The parent company doesn't have to because Pioneer Finance has worked out an agreement," said Lowden.
Santa Fe got another piece of bad news last week when the American Stock Exchange informed the company it no longer meets its minimum asset listing requirement. Lowden explained that Santa Fe wrote down some of the goodwill it had carried on its booksafter the passage in California of Proposition 5, which is expected to expand Indian gaming there.
Goodwill is an intangible asset representing the perceived market value of a company over and above the sum of its assets. For instance, goodwill can reflect a good reputation or the high value placed on a certain name or brand.
Lowden declined to discuss what steps Santa Fe will take to ensure its continued listing on the Amex, but said the company would do whatever is necessary.
"I'm not going to sit here and be delisted," said Lowden.
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