Station Casinos, Herbst Gaming fight bondholders in bankruptcy cases

By Steve Green

Thursday, June 17, 2010 | 9:18 a.m.

Two Las Vegas casino companies are resisting efforts by bondholders to have action in their bankruptcy cases delayed while bondholders appeal adverse rulings.

Bankruptcy Judge Gregg Zive in Reno has scheduled hearings for Monday on motions by bond investors that an Aug. 6 auction of casinos and hotels be delayed in the Station Casinos Inc. case; and that the Herbst Gaming reorganization be put on hold.

In the larger Station Casinos case, attorneys for bondholders say their clients stand to lose $2.5 billion -- in part because of rulings by Zive in favor of a plan by Station insiders to proceed with an auction of 11 of the company's casinos and hotel-casinos.

In their appeal brief to U.S. District Court, the bondholders, who are unsecured creditors, say the bidding plan is "tainted by insider dealing" and was written in ways that discourage competitive bidding and doesn't fairly value some of the Station assets.

Under the plan approved by Zive, members of Station's founding Fertitta family and certain lenders would be the "stalking horse" bidder for the 11 "OpCo" properties including Texas Station, Santa Fe Station and the two Fiestas.

As the stalking horse bid, that group's bid of $772 million would have to be exceeded by other bidders should they want to purchase the properties.

Under a separate deal with secured lenders, the Fertittas and Station co-owner Colony Capital would maintain control of the Wild Wild West along with four of the company's largest properties and biggest cash generators.

Called the PropCo properties, these are Red Rock Resort, Sunset Station, Boulder Station and Palace Station.

Two more properties -- Green Valley Ranch and Aliante Station -- are partnerships with the Greenspun family, owner of the Las Vegas Sun. The partners are attempting to restructure their debt outside of the bankruptcy process and they are not part of the auction.

In a court filing Wednesday, attorneys for Station argued against delaying the auction. Because the recession has reduced the value of Station's assets and its ability to service its debt, there's not enough money to go around in the bankruptcy reorganization to satisfy all creditors and Station says the bondholders are "out of the money."

"The Official Committee of Unsecured Creditor’s likelihood of success on the merits on appeal is low," Station attorneys said in their filing.

"The committee will not be irreparably injured if the stay is not granted because even if the auction were structured exactly as the committee wishes, there is absolutely no evidence that the auction will result in any recovery for the unsecured creditors of Station Casinos that the committee purports to represent in the Chapter 11 cases," Station attorneys said in their filing.

The Station attorneys added that: "A stay of the bidding procedures would result in the potential for a substantial destruction of value for the (casino group) estates and its creditor constituencies. Any delay will place in substantial jeopardy the $772 million OpCo stalking horse bid — a bid that provides an 87 percent recovery to OpCo’s secured lenders and protects OpCo from the enormous downside risk of a 'naked auction."'

Station attorneys said if the auction is delayed, the bondholders should be required to post a $150 million bond to cover any damages sustained by the company and its secured creditors because of the delay.

"A stay of the bidding has the potential to critically damage the debtors’ reorganization. The stalking horse bid is subject to a number of specified termination events, several of which are likely to be tripped if the bidding procedures order is stayed and the auction for the OpCo assets is delayed," Station's filing said.

Station said a bid of about $1 billion for the OpCo properties would be needed to pay off the secured creditors and provide a recovery for the bondholders, and, "The committee has presented no evidence that there is any realistic scenario of that sort of improvement in value."

In the Herbst Gaming case, Zive last year approved a reorganization plan in which secured lenders are taking over the company. Bondholders -- again unsecured creditors -- were out of the money in that case as well and stand to lose $362 million.

In both cases, the bondholders have been unsuccessful in arguing they should recover some money at the expense of secured creditors because management of both companies entered into deals that eventually harmed the bondholders.

In Station's Case, that was the $8.8 billion going-private transaction in 2007 that burdened the company with $1.6 billion in additional debt.

In Herbst's case, the company in 2007 purchased three hotel-casinos in Primm and a property in Northern Nevada just as the economy was heading into recession.

The Herbst bondholders demanded in a November bankruptcy court lawsuit that they recover $153.7 million and that the secured lenders' recovery be reduced by $549 million.

The bondholders' arguments have previously been disputed by Herbst and the secured lenders. Herbst said it was driven into bankruptcy by the recession, not its debt-financed takeover deals.

Station, similarly, has said it was the recession as opposed to the going-private deal that pushed it into bankruptcy.

In the Herbst case, the bondholders are disputing arguments that by delaying the reorganization, Herbst's "business would be in limbo for several years and that employee morale would be adversely affected, leaving the debtors unable to effectively compete with their peers in the industry."

"The debtors have operated in bankruptcy for more than a year, and there is no evidence that continuing to operate under bankruptcy protection would further erode employee morale or place the debtors’ operations in 'limbo,'" attorneys for the Herbst bondholders said in a filing Monday.