Infusion of cash is key to Station’s viability

By Liz Benston

Friday, Dec. 26, 2008 | 2 a.m.

Station Casinos is hoping business will be strong in the coming weeks and that customers use some of the company’s coupons and offers flooding airwaves and mailboxes.

The company’s viability depends on it.

Executives aren’t saying much these days. Yet recent financial disclosures are speaking volumes about the company’s declining health and indicate that the company is running out of options as it fends off a bankruptcy filing.

Last month, analysts were hopeful that holders of Station Casinos bonds would help the company ride out the recession by allowing the company to refinance the bonds at discounted rates, thus saving the company millions of dollars in interest costs.

Bondholders, many represented by lawyers, dashed such hopes when they rejected the offer about three weeks later.

Squeezed by a prolonged consumer recession that is hurting the company’s ability to pay down more than $5 billion in debt accumulated during the credit boom, Station Casinos is burning through cash needed to run the company.

Last week Station drew down on its last chunk of cash, a $257 million revolving line of credit.

Many companies are choosing to borrow available funding now on fears that banks, struggling to fix their own cash crunch, won’t lend the money when needed.

Station’s move was expected. By having too much debt on its balance sheet, the company is expected to violate the terms of a $900 million bank loan before the end of the year, which would allow lenders to cut off access to the money. Getting the cash now, analysts say, could give the company more leverage in a bankruptcy restructuring.

Standard & Poor’s cut Station Casinos’ secured debt rating to “CCC” from “B-” after bondholders rejected the exchange offer last week. S&P also put the company’s “CC” bond credit rating on CreditWatch with negative implications.

By comparison, S&P had a “CCC” credit rating, one notch higher than Station’s “CC” rating, on Herbst Gaming until May, when Herbst missed an interest payment and became insolvent.

Station will violate the terms of its bank loans this quarter unless it can amend them, S&P said. Violating such terms could trigger a bankruptcy.

The company, which declined to comment, is negotiating with its lenders.

“We are skeptical that any amendment to the credit facility that does not include a significant equity infusion will allow Station to meet debt service requirements over the intermediate term,” S&P analyst Ben Bubeck said.

Whether Station will become the largest local victim of the global downturn might come down to whether the Fertitta family, which founded the company and owns about 24 percent of it today, is willing to write a big check, as Las Vegas Sands Chief Executive Sheldon Adelson did last month to keep his company afloat.

Adelson’s $1 billion cash infusion prevented the company from defaulting on its bank loans.

The amount of cash Station’s Fertitta family, or their investment partners, Colony Capital, might offer under such a scenario is an open question, especially because Colony is facing problems with countless other real estate investments that have been pummeled in this economy. Those include its Resorts Atlantic City casino, which recently missed an interest payment.

(Station Casinos’ Aliante Station and Green Valley Ranch casinos are joint ventures between the company and the Greenspun family, which owns the Las Vegas Sun.)

Some analysts think the Fertittas will do whatever they can to prop up the company they helped to build. It’s unknown how much of the Fertittas’ cash isn’t tied up in other investments, such as their Ultimate Fighting Championship franchise.

Such equity could become worthless in a bankruptcy.

One option available to casino companies such as MGM Mirage, which is selling Treasure Island to raise cash, doesn’t make sense for more highly-leveraged companies like Station.

Like many homeowners whose mortgages are higher than the value of their homes, Station’s properties are worth less than their value relative to the company’s debt. Selling properties wouldn’t make much of dent in that debt and would reduce the earnings the properties generate. In any case, few buyers have the cash or the ability to get licensed.

As of Sept. 30, Station said it was paying about a dollar in interest for every $2 in earnings, leaving very little to spare on operations. According to terms with bank lenders, that ratio can’t fall below a dollar of interest for every $1.75 in earnings through the end of this year.

Starting March 31, the company will be required to make more money relative to its interest payments.

Also, those terms state that Station can’t have more than $8 in debt to every dollar of earnings through the end of this year, with that maximum falling next year. As of Sept. 30, the company had $7.40 in debt to every earnings dollar.

Meeting such requirements will be difficult, if not impossible, if the recession continues until at least mid-2009 or 2010, as experts predict. As business has tanked, so has the cost of doing business.

Station has cut the cost of comps for gamblers, trimmed staff, reduced restaurant hours and closed company-owned restaurants that have been replaced by tenants. From January through Sept. 30, the company has slashed casino expenses by 5 percent and food and beverage costs by 10 percent. (Room expenses went up 10 percent on a 2 percent decline in room revenue.)

Overall, expenses rose slightly on a 7 percent decline in revenue over those nine months.

The company with the most to gain from the once-stunning growth of the Las Vegas market is now the one with the most to lose, relative to competitors.

Station has become the casino equivalent of well-meaning homeowners who took on debt with the hope that they could refinance their mortgages and make more money in the future.

Homes aren’t supposed to be money-making investments. Yet the leveraged buyout of Station Casinos was envied as a seemingly no-lose proposition that could make its owners fabulously wealthy by using borrowed money, paying that down relatively quickly and taking the company public again years later.

This was the cutting edge of financial engineering and a new era for private equity funds such as Colony Capital that are known for making opportunistic takeovers of distressed companies.

Unlike some of Colony’s targets, Station wasn’t a company in decline. Those who bought Station stock during its formative years as a small casino company made lots of money when it sold for $90 per share. Yet it seemed a relatively small price to pay at the time for a company generating consistently strong earnings with an unrivaled pipeline of future casinos.

Colony and the Fertittas — two entities thought to be among the most knowledgeable about their respective industries — were taken by surprise.

So were bondholders, who commonly seek legal representation when they smell trouble and are now in the driver’s seat.