Tuesday, April 3, 2001 | 10:55 a.m.
The Aladdin failed to produce enough cash flow to service its debt in its first full quarter of operations, the Strip megaresort's parent company reported Monday.
As a result, the Aladdin remains almost totally dependent on its two major shareholders for financial support -- and there is "substantial doubt about (the Aladdin's parent company's) ability to continue as a going concern," auditor Arthur Andersen reported.
"Clearly, the struggle continues," said Jason Kroll, gaming analyst with Bear Stearns. "Operationally, they're going to continue to struggle, and at this point, it's a question of how comfortable London Clubs (International) and Sommer (Trust) are in supporting them. You've got to start seeing some signs of real progress."
"The conclusion is that, with their struggling performance in an overall strong market, the Aladdin needs to pull a rabbit out of the hat to reverse their current negative performance," said Andrew Zarnett, gaming analyst with Deutsche Banc Alex. Brown.
The Aladdin reported cash flow of $14.2 million for the quarter ending Dec. 31. Combined with the negative cash flow of $3.2 million posted the quarter before, that puts the Aladdin's cash flow at $11 million for 2000.
While cash flow improved significantly from quarter to quarter, it still is not enough to cover the Aladdin's annual debt payments, estimated at $80 million per year. And that situation is expected to continue, the report said.
While cash on hand and cash flow is enough to cover operations, "such amounts might not be sufficient to fund all the company's ... payments on the company's debt during 2001," the report said, putting the property at risk of default.
A default was recently avoided when LCI and the Sommer Trust pumped cash into the project. LCI, the project's main financial backer of late, put another $5 million into the Aladdin in January, while the Sommer Trust invested $7 million last Friday.
The Aladdin was also successful in negotiating a waiver of certain requirements with its bankers last Friday, preventing the company from going into default immediately. However, the Aladdin said, "based on its results year-to-date, (the company) may not be in compliance with the revised financial covenant levels for the quarter ended June 30, 2001."
"Failure to achieve such financial covenant levels will constitute defaults under the credit facilities," the report stated. The company said it has initiated talks with its lenders to further relax the resort's covenants in an effort to avoid a default.
The Aladdin said it will need continued payments from LCI and the Sommer Trust to keep going through the coming months, and the two are obligated under bank agreements to invest as much as $30 million a year if needed. But LCI's ability to continue backing the Aladdin -- a project that has already cost it more than $200 million -- could be running out.
Losses from the Aladdin have hammered LCI stock over the past six months, and Monday's report caused further hemorrhaging. LCI fell more than 10 percent on the London exchange today to close at 32.50 pence, a 52-week low. Speculation heated up today in the British financial press that LCI would need to launch a rights offering to recapitalize itself.
"(LCI) doesn't have significant financial resources at this point," Kroll said. "It's pretty incumbent on Sommer to continue to step up to the plate."
Prior to the trust's $7 million investment in March, the trust had not put money into the Aladdin in more than a year, forcing LCI to fund the project's shortfalls.
Jack Sommer, trustee of the Sommer Trust, said he couldn't comment on whether the trust would make additional cash payments in the future. But he called his current investment "a vote of confidence" in the Aladdin.
"We do believe in the property, we do believe in the investment," Sommer said. "That's why we're putting in the money."
To assist in the Aladdin's cash needs, the two shareholders are seeking out other sources of capital, including borrowing additional cash, selling off a 5-acre, undeveloped land parcel near the Strip and Harmon Avenue, equity investments by a third party and renegotiation of the Aladdin's credit covenants. The resort has also been cutting its payroll to reduce expenses.
Sources have indicated LCI wants to convert its preferred shares in the Aladdin to common stock as part of a last-ditch effort to recapitalize the Aladdin. By converting, LCI's stake would jump from 40 percent to more than 80 percent, and the Sommer Trust would lose its majority position. LCI then hopes to sell off at least half of its increased equity stake, raising funds for both itself and the Aladdin.
Sommer refused to discuss this possibility, citing a confidentiality agreement with LCI. But he noted that "there is no such conversion feature" to LCI's preferred shares.
In fact, Sommer said, "the trust is exploring the opportunity of increasing its stake in Aladdin Gaming," though he said no formal negotiations are under way.
Gross revenues reached $96.4 million in the quarter ending Dec. 31, up from $40.6 million in the September quarter. The resort's net loss was $23.6 million, down from a loss of $40.2 million.
The company's casino revenues rose from $19.4 million in the September quarter to $51.1 million in the quarter ending Dec. 31, but revenues were apparently boosted by unusually high table game hold during the Aladdin's first four-and-a-half months of operation. Average table game hold is 17.5 percent, the Aladdin said -- the resort's table held 21 percent during the period.
But hold percentages cut both ways, and it is now working against the Aladdin. In the quarter ending March 31, table game hold ran at a below-normal 14.8 percent, a shift that will almost certainly drag down casino revenues.
The Aladdin indicated results were very weak in January, though the situation has been improving since then. In January, the resort recorded occupancy of just 79 percent, and daily win per slot machine of just $66. By comparison, most large Strip resorts achieve win per unit of more than $130 per day.
To counter that trend, the resort initiated a new marketing campaign in February, designed to position the property as a "hip, fun, new, must-see property." Marketing efforts are centered around building the casino's customer database, as well as developing events designed to boost casino play. The resort also hired two executives to boost marketing efforts.
By March, the campaign pushed occupancy up to 99 percent, though the Aladdin didn't indicate its average daily room rate. Daily slot win increased to $97 by March, still below Strip averages but a marked improvement over January levels.
Given the current situation, bankruptcy is a possibility that cannot be ruled out, Kroll said.
"Clearly they're going to do whatever they can to avoid (bankruptcy), but you can't rule it out at this point with the cash flow they're generating," Kroll said. "That's definitely a possibility at some point if the sponsors stop supporting the project."
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