Thursday, May 20, 1999 | 11:06 a.m.
Competition in the gaming industry is tough, so tough, say Fitzgeralds Gaming Corp. officials, that the company has to restructure its debts if it wants to stay competitive.
Las Vegas-based Fitzgeralds, which operates casinos in downtown Las Vegas; Reno; Tunica, Miss.; and Black Hawk, Colo.; announced last week it had decided "it would not be in the best interest of the company to make the regularly scheduled interest payments on its $205 million 12 1/4 percent senior secured notes due 2004."
The next interest payment is due June 15, and Fitzgeralds officials hope to come to some kind of agreement with the noteholders by then.
"We're really trying to keep a good relationship with them," said Michael E. McPherson, senior vice president and chief financial officer.
At April 4, the company was carrying $207.9 million in long-term debt on its books. At the annual rate of 12 1/4 percent, the company is obligated to make interest payments of about $25.47 million each year. The installment due June 15 is $12.5 million, a company official said.
Fitzgeralds will discuss its decision with bondholders in a conference call today.
The decision to stop making interest payments comes only 17 months after Fitzgeralds floated the notes in a December, 1997, private placement, and only seven months after arranging a separate $15 million bank credit facility. Fitzgeralds has only drawn down about $3 million on that facility.
The notes were later exchanged for publicly exchangeable notes, and included a provision that let Fitzgeralds place the bank facility in a position senior to the notes.
The company came to last week's decision, said McPherson, after a year of slower-than-expected growth and tougher-than-expected competition.
"We haven't grown as quickly as we thought we would, and we've encountered huge levels of competition in all markets," said McPherson. "In a competitive situation, you have erosion at the margins."
To keep up, Fitzgeralds has found it has to continually pump money into its properties, McPherson said.
"We just made a commitment that to stay competitive, you have to keep putting money back in," said McPherson.
But with lower than expected cash flows and high fixed interest payments, the company simply does not have the money to put back into its properties, said McPherson.
"In order for us to keep putting money back into it, we've got to restructure the debt," said McPherson.
"(The company's) relatively high degree of leverage has prevented it from making the level of capital expenditures required to maintain and enhance the competitive position of its properties," states Fitzgeralds' latest quarterly earnings filing with the SEC. "Management and the board of directors do not see any way to resolve this problem without restructuring the company's indebtedness."
In the quarter that ended April 4, Fitzgeralds lost $4.1 million, or $1.03 per share, on revenues of $52 million. In the year-ago quarter, the company lost $3.7 million, or 93 cents per share, on revenues of $47.4 million.
Fitzgeralds generated earnings before interest, taxes, depreciation and amortization -- EBITDA or cash flow -- of $7.8 million in the quarter, down from $8.1 million in the year-ago quarter.
In 1998, the company lost $8.7 million on revenues of $207 million. Over the same period, Fitzgeralds generated cash flow of $30 million.
The results were an improvement over 1997, when the company lost $31.5 million on revenues of $179.7, and generated cash flow of $30.6 million. The company has lost money each of the last five years, but cash flow has never dipped below its 1996 level of $13.5 million.
Long time gaming executive Philip D. Griffith owns 64.6 percent of Fitzgeralds' stock. Griffith is chairman and chief executive of Fitzgeralds.
In an appearance before the Nevada Gaming Commission last December, Fitzgeralds executives were criticized for the company's financial performance.
"You have got to start generating cash," said Commissioner Augie Gurrola.
Tuesday, Standard & Poor's downgraded its debt ratings for Fitzgeralds to double-C from triple-C, citing the announcement that the company would miss interest payments. That downgrade follows an April S&P downgrade from single-B-minus to triple-C. For that downgrade, S&P cited weaker-than-expected results for 1998, and concerns about the company's limited financial flexibility and lack of liquidity.
In April, Fitzgeralds said it might try to restructure its debt.
The 1997 notes were themselves floated to pay down older notes due that year that carried interest rates in the 13 percent range and required Fitzgeralds to pay noteholders 25 percent of EBITDA if the company did not go public by a certain date. The note offering also allowed the company to consolidate some debts secured separately by its properties in Reno and Black Hawk.
"Basically all we did was consolidate our debts and pay off existing debts," said McPherson of the offering. "We had to do that."
Of the October credit facility, $10 million was intended for general corporate purposes -- that's the portion from which Fitzgeralds has drawn $3 million -- and $5 million was intended for an expansion of the company's Black Hawk resort. That expansion is still in the design phases, and no money has yet been drawn for construction, said McPherson.
The company's noteholders were informed of its decision not to pay interest only last week, he said. Fitzgeralds has now contacted its larger noteholders, but McPherson declined to name them. He said the company is unaware of any buying by noted corporate raiders and investors, as has happened with the Stratosphere, Arizona Charlie's and Santa Fe Gaming Corp.
Fitzgeralds' recent quarterly earnings filing with the SEC explains what could happen if the company defaults on the notes:
"A default on the senior secured notes would constitute a default under the credit facility and ... there can be no assurance that the lending institution will continue to make additional advances, that it would not accelerate payment of amounts outstanding under the credit facility or that it will refrain from exercising any other remedies available to it."
The filing also warns that, "failure to make such an interest payment could result in a reclassification of long-term debt to current."
In the filing, Fitzgeralds says its financial problems will not affect its operations:
"The company believes that its liquidity and capital resources are sufficient to maintain all of its normal operations at current levels during the restructuring period and does not anticipate any adverse impact on its operations, customers or employees."
However, Fitzgeralds warns, "there can be no assurance that the company will be able to successfully restructure its indebtedness or that its liquidity and capital resources will be sufficient to maintain its normal operations during the restructuring period."
In an era of massive resort construction on the Strip and the rapid expansion of gaming nationwide, many observers have said that operators of smaller, less distinct gaming properties will suffer. There have been several gaming company bankruptcies in the Las Vegas area in recent years -- including the Riviera, Four Queens, Stratosphere and Arizona Charlie's; as well as Santa Fe subsidiary the Pioneer hotel-casino in Laughlin.
All have been attributable in some way to over-borrowing and overly optimistic predictions about future financial operations.
McPherson said he honestly cannot tell whether Fitzgeralds will be next.
"It's too soon to tell how this is going to fall out," said McPherson. As far as a bankruptcy filing, "that's a possibility, but we just don't know right now."
"We just made a commitment that to stay competitive, you have to keep putting money back in."Michael E. McPhersonFITZGERALD GAMING CORP. SENIOR VP AND CEO