Smaller casinos in big debt, too

By Liz Benston

Monday, April 20, 2009 | 2 a.m.

It’s not just the big boys running into trouble for accumulating too much debt. Smaller casinos, including the Greek Isles and Hooters, have also become the pawns of lenders.

Their operators owe millions of dollars, rather than billions, but their predicament is parallel to that of the debt-laden gaming giants grabbing the headlines.

Like buyers who fixed up an overmortgaged home before taking a big pay cut, the owners of Hooters, who include the creators of the restaurant chain and the Japanese owners of the former San Remo, accumulated $145 million in debt on a company that generated $7.4 million in cash from operations last year. The property is expected to make even less this year, when $13.5 million in debt maturities and interest payments are due.

Hooters’ owner, 155 East Tropicana LLC, has fully extended its credit facility and failed to make a $5.7 million interest payment due April 1, which could trigger a Chapter 11 bankruptcy protection filing.

A lender’s dilemma

Their lenders may end up with a fraction of what they are owed from the sale of the property in a foreclosure auction or bankruptcy transaction.

One potential loser is Canyon Capital Realty Advisors.

Canyon — a Beverly Hills firm with more than $10 billion in capital that specializes in short-term, high-interest-rate loans paid back once a project is completed, refinanced or sold — gambled on a number of the small Las Vegas casinos encountering trouble in this economy.

One of these gambles paid off. The company dodged a potential bullet by receiving payment for a $48.5 million bridge loan used to finance the transformation of the former Hotel San Remo into a Hooters-branded casino.

Hooters owners replaced the bridge loan with public bond debt more than three years ago, before the economy soured.

But its investment in the Greek Isles casino, which is further along the road to insolvency, isn't doing so well. The subject of various redevelopment plans over the years, the Greek Isles had a big selling point with its Convention Center Drive location and proximity to the Las Vegas Convention Center. That means less in today’s economy.

The casino received a $56 million loan from Canyon in July 2007, when owners GIH-SPE II purchased the property for $48.9 million. The owners failed to pay the balance and interest owed when the loan matured in July 2008.

A Canyon subsidiary, Canpartners Realty Holding Co., filed suit in January to enforce its right to receive future rents and profits and appoint a receiver to oversee management. (Lenders say the owners didn’t maintain the property as required and didn’t pay expenses, exposing the lender to liens from creditors. Former Caesars Palace President John Groom was appointed receiver in February.)

A battle for position

A small group of unsecured creditors filed a Chapter 11 bankruptcy petition against the owners this month, which would temporarily halt any foreclosure proceeding by the lender and is a possible preemptive strike by the creditors, who may want to take their chances recovering any cash in bankruptcy.

Meanwhile, the Lady Luck casino downtown, where Canyon funded a $66 million bridge loan for a planned renovation, isn’t generating any revenue. Owner Andrew Donner closed the property in 2006, hoping to redevelop it as a boutique hotel.

Canyon’s recent misadventures with small Las Vegas casinos are a stark contrast to recent years, when Las Vegas developers didn’t have to build anything to make money.

In late 2005, Canyon financed an investment by developer Concord Wilshire in 7.6 acres north of Circus Circus — the site of a proposed Maxim magazine-themed resort. The plan was short-lived and Concord, which paid $90 million for the land, sold it two years later to Circus Circus owner MGM Mirage for $131 million.

Editor's note: This story has been corrected to note that Canyon no longer holds the Hooters' debt.