Q&A: Sean McGuinness

By Steve Green

Monday, Feb. 14, 2011 | 3 a.m.

Gaming companies large and small have plenty of financial, legal and regulatory issues to deal with — and attorneys are usually front and center in the decision-making progress.

Las Vegas-based law firms represent many casino operators, suppliers, lenders, Indian tribes and unions on numerous issues, including supplementing the work of in-house counsel.

One of the largest gaming practices is operated by Lewis and Roca LLP, which has a national gaming practice and gaming and restructuring attorneys in Las Vegas, Reno, Phoenix and other cities.

Lewis and Roca’s gaming and bankruptcy practices have seen their share of comings and goings in recent years. Las Vegas bankruptcy specialist Brett Axelrod and three other reorganization attorneys left in 2008, and attorney Bruce Beesley in November was named a U.S. Bankruptcy judge for Nevada.

Lewis and Roca’s gaming and bankruptcy practices remain strong with such well-known attorneys as Anthony Cabot, Dawn Cica, Gregory Giordano and Sean McGuinness in Las Vegas; Stephen Hart in Phoenix, and Paul Bible and David Mousel in Reno.

McGuinness, a partner in the gaming practice, in the 1990s was compliance director for the Mississippi Gaming Commission, was a private attorney there and later was general counsel for the Resort at Summerlin. Before joining Lewis and Roca, he had been with the firm Beckley Singleton, which partnered with Lewis and Roca in 2007.

McGuinness has participated in gaming matters with the National Indian Gaming Commission and in Nevada, Mississippi, Colorado, Iowa, California, Louisiana, Michigan, New Mexico, North Dakota, Oklahoma, Canada, Switzerland and Hungary.

He recently represented the senior lending group to Herbst Gaming, which converted its debt position into a controlling equity stake in the Las Vegas company through bankruptcy.

IBLV: Has the gaming industry bottomed out from the recession?

McGuinness: Las Vegas is still coming back. I don’t think you’re going to see new projects coming on line for the next several years. The Cosmopolitan just opened. That was ... the last of the previous era’s construction boom.

What you’re starting to see is with the Fontainebleau, for example, which was stopped, a lot of the furnishings and fixtures sold at auction. Companies that are smaller gaming companies such as Herbst bought a lot of it and renovated its Primm properties — with very good prices on carpet and furnishings — with things it normally couldn’t do. It’s coming from a seller who’s saying: “What do we do with these assets? You can’t just sit there and hold on to them.”

It’s going to be a mixed bag. You see, for example, there are projects going forward in Mississippi. There is a project in Iowa. In other parts of the country where the recession hasn’t hit as strongly there is still a gaming market that’s been fairly strong and fairly reliable.

I think (Las Vegas) has hit the bottom. In the last couple of months there’s been more visitation, and gaming revenue finally did bounce up recently for a month. Those are all good signs

I tie it to what happened with Christmas spending in the country. People were finally spending more than what they had in the previous year and the year before that. That’s a good sign: People feel they have more spendable income. That makes a trip to Las Vegas much more attractive if they’re coming from that mind-set and not totally hunkered down.

Even if we’ve bottomed out, are we still going to see more gaming restructurings in Las Vegas?

I think so. The bottom line is when the economy was good, a lot of companies became leveraged up higher than where they needed to be. There is an adjustment.

A lot of times people think a restructuring only happens in the Bankruptcy Court context. It doesn’t necessarily have to happen in that context. It can be a negotiated restructuring outside of the court. They all have the same type of components. You have lenders owed a significant amount of money and what do they do with that? Really, converting their debt, a portion or all of it, into equity and determining the management team going forward is really the only path to go forward.

You saw that in the Herbst case. You’re seeing a variance of that in the Station Casinos case, and you’re probably going to see more of it.

With all the losses and restructurings, is Wall Street going to be hesitant to do deals in Las Vegas?

I don’t think so. You have these financial institutions converting their debt into equity and looking at what these properties and companies are really worth. In the Herbst bankruptcy for example, the lenders converted their debt into equity. They’re going to hold on to the properties and see it through. They hired a management team. They’re not looking to do a fire sale or dispose of the assets in a nonthoughtful manner.

They’re looking to get their arms around it and see what can be done. They see the economy is bouncing back, and they see some opportunities. The nice part is I’ve seen a couple of instances with a couple of clients where if the lenders do see a bona fide business reason to spend some money either on CAPEX (improvements) or potentially on acquisitions, they are receptive to that. I think in the right setting, financing can be had. I don’t think you’re going to see Wall Street signing up to build a megaresort on the Strip in the next few years. But there are deals to be had out there. There are people with money and access to capital.

Will the industry in the future be financed with more equity and less debt?

I think debt will always be a factor. You may see the leverage ratios changing. Before the economy turned there were debt/annual EBITDA multiples going up to 12 times. I don’t think you’ll see 12 times again. It’s righting the course and getting back to where we were before the high leverage multiples came on the scene. (EBITDA is a profitability measure meaning earnings before interest, taxes, depreciation and amortization).

In some of the restructurings the lenders were able to keep these companies together. Why did that make sense as opposed to the lenders saying “let’s break these up and sell these casinos one at a time”?

It’s for gaming regulatory reasons. A lender cannot influence casino operations or exercise control over a gaming licensee and its operations. In order to do this in a regulatory-compliant manner, you have to have some sort of restructuring so you don’t have a lender saying “you need to do sell casino X or casino Y, and if you do that we’re going to do this for you.” As you look at it from a regulatory perspective, you need to get the assets worked out together, and then you can determine what to do after you convert your debt into equity.

Should the gaming industry be paying more in taxes and fees in Nevada to help meet budgetary needs?

One of the proposals going forward is to have the gaming industry fund its own regulation. In Mississippi, they’ve gone to a format where the casinos are self-funding the regulatory system. If you look at what’s happened to the numbers, it would be a hit for the (Nevada) gaming industry to suddenly have these fees. That could slow down the recovery some of these companies are having. When the Gaming Control Board does an investigation, it charges the applicants investigation fees. They raised the investigative fees in July, so this has already kind of started.

Have Nevada’s low gaming taxes driven growth here, or have they been a windfall to the industry?

I think it’s helped the growth in this state. Mississippi, for example, is the next-lowest to Nevada. It’s far exceeded (market projections) because it has a business-friendly atmosphere that’s based on the Nevada model. It’s something that’s allowed companies to expand operations outside of this state, which even though they may have operations outside of Nevada, these operations still come back to gaming operations based in Las Vegas or Reno, and that’s good for the state. You see other states, for example Illinois a few years ago, significantly raised their tax and that had a real chilling effect on operations and employment. You had situations where casinos were shutting down operations in the graveyard shift. In Iowa the governor recently announced that he’s potentially looking at raising their tax from 22 percent to 36 percent, and that would be a real significant game changer as far as what the properties there could do.

Does Indian gaming hurt Las Vegas by attracting business that otherwise would come here, or does it help Las Vegas by stimulating demand to come see something bigger and better?

I think it does a little bit of both. With the economy recently we’re seeing more of the former where for somebody living in San Diego, it’s much easier to go to an Indian facility an hour away. But as the economy bounces back, there’s really only one Las Vegas experience and I think you’ll see those customers wanting to experience all the things Las Vegas has.

The Herbst properties at Primm have started marketing to a Spanish-speaking market, which the tribal casinos don’t do. That’s another example of the creativity you see here.

What are the issues with Las Vegas-based companies managing Indian casinos?

Under federal law those contracts can only last seven years. The amount of compensation a manager can get is also dictated by statute. So every Indian deal kind of stands on its own. For large companies like Caesars (Entertainment) or Station Casinos, they need to look at markets with a sizable market and a sizable return to make it worth their while. They need to look at how much management time would be expended on the tribal contract and how much bang for the buck or how much reward do you get. Is it going to be enough as opposed to an opportunity in Colorado, or the Midwest or something like that? You have the reward programs. That does create an opportunity (for Indian casino managers based in Las Vegas to drive business to Las Vegas).

What’s happened since the Obama administration took over? Is it more open to seeing more tribes have casinos?

It’s really taken a lot of time to decide how to implement its policy in Indian country. The National Indian Gaming Commission has had much greater outreach toward the tribes and tribal gaming operations than the previous administration did. Right now the NIGC is reaching out to the tribes to see about adopting internal control standards and having some standard gaming ordinances agreed to with a dialogue about what would be acceptable. The previous administration attempted to just mandate internal control standards and that didn’t go over very well at all.

There are expansions that aren’t controversial that the Obama administration started granting last year — the Navajo tribe for example (in Arizona). It really hasn’t dealt with a far-flung reservation project yet (in which the casino would be in a metro area far from the reservation and likely would be controversial). I think it’s more cooperative with the tribes and it’s more open to expansion.

What’s the outlook for the expansion of Internet gambling in the United States?

Congress was unable to get that passed in the last lame-duck session, so with the Republicans in charge of the House the likelihood of getting a similar bill out is slim

This is a business opportunity for Las Vegas?

The Nevada Gaming Control Act has already been amended to allow for Internet gaming licensees in ... Nevada. The only thing stopping that from going into effect is confirmation it’s not going to violate some federal prohibition. Nevada, and Las Vegas in particular, do have the brands that are recognized worldwide. If you could use those brands online and do so in a regulated setting with an agency that has worldwide respect for dealing with patron disputes and the integrity of the computer software and the programs running the games, it would be a great opportunity for Nevada.

Are we likely to see intranet gambling expansion within the states?

There is some opportunity to do things within the states’ borders. You’ve seen the sports books do that here.

What about intrastate online poker proposals?

You’re starting to see that. It’s the state budget shortfalls (driving that).

What have you been telling clients about the Gaming Control Board and the Gaming Commission having concerns about problems in Nevada casino nightclubs?

We certainly told them to be more careful. The Gaming Control Board has been pretty consistent for quite some time about its concerns. It’s been an evolving dialogue. The gaming operators have taken all this very seriously to make sure what happens in the nightclubs doesn’t affect their operations or their licenses.

Is the situation under control?

I think it’s getting under control. It’s a process. With the recent fine paid by the Hard Rock, people are getting the message. You’re seeing a lot of nightclub operators on the Strip have been changing in recent months as well.

How is the gaming practice at Lewis and Roca evolving?

I think we have the largest gaming practice of any firm that has an office in Nevada.

Tony (Cabot) has a lot of manufacturing and distributor and casino operator relationships. Greg (Giordano) has corporate securities. Paul (Bible) and Dave (Mousel) have a background in regulatory issues. I’m sort of the multijurisdictional guy who can handle transactions and do things in other jurisdictions, which is beneficial for the clients.

Part of why we’re all at Lewis and Roca is that having a regional firm — offices in Phoenix, Tucson, Albuquerque, Las Vegas, Reno and the Silicon Valley — there’s a platform that other Nevada-only firms don’t have.

We can go to attorneys in Phoenix and other offices who are able to supplement what we have. It’s also been helpful with the integration between the Indian and commercial practice — those industries are starting to overlap.

We’re still a strong player, and we have significant experience in the gaming bankruptcy forum. I’ve been involved on the regulatory side in several bankruptcy cases over the years.