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August 24, 2019

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Station’s legal battle heats up in bankruptcy case

Company seeking approval to bring on additional attorneys

Station Casinos properties

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Station Casinos Inc.'s lenders continue to fight amongst themselves and Station is seeking court approval to pay for more attorneys to deal with threatened litigation associated with its bankruptcy case.

While Station has expressed hope for a speedy resolution to its bankruptcy case, court papers filed Friday show the case is becoming increasingly complex and contentious as the company, lenders and other creditors assert arguments in the restructuring process.

The Las Vegas company, controlled by Colony Capital of Los Angeles and the Fertitta family of Las Vegas, and certain subsidiaries filed for bankruptcy protection July 28.

Hit hard by the recession and the resulting reduction in spending at its locals casinos, Station defaulted on debt obligations this winter and is now trying to restructure $5.7 billion in debt.

Station on Aug. 14 said second quarter revenue fell 21 percent year to year, to $267.2 million, contributing to a quarterly loss of $65.3 million vs. a profit in the year-earlier quarter of $18.6 million. Little improvement is likely in the third quarter, with Las Vegas-area unemployment jumping from 12.3 percent in June to 13.1 percent in July.

Station's casinos and hotels remain open as the bankruptcy case moves forward. During the proceedings, Station will have an opportunity to propose a plan of reorganization -- a plan creditors and lenders can support, oppose or propose amendments to.

Competitors, too, will have an opportunity to propose the acquisition of all or portions of the company and Boyd Gaming Corp. of Las Vegas has already designated an attorney to represent its interests in the case.

With the bankruptcy process now under way, Station on Friday asked the court for permission to continue with policies that indemnify its directors and give them access to its directors and officers insurance policies; and to reimburse them for professional fees incurred after the bankruptcy filing.

Station said two of its directors appointed by Colony Capital -- Colony Chairman and Chief Executive Thomas Barrack Jr. and Colony Chief Investment Officer Jonathan Grunzweig -- are represented by the law firm O'Melveny & Myers LLP.

It said two of its directors from the founding Fertitta family -- Station Chairman and Chief Executive Frank Fertitta III and Vice Chairman Lorenzo Fertitta -- are represented by the firm Munger Tolles & Olson LLP.

Station said its sole independent director, Las Vegas veterinary medicine entrepreneur Dr. James Nave, has engaged the firms Skadden, Arps Slate Meagher & Flom LLP and Jones Vargas.

As the bankruptcy case proceeds, the directors may face litigation from bondholders and others, Station said.

Station said that after it failed to pay interest due on its unsecured bond debt in March, it was informed that an ad hoc committee of bondholders was formed representing at least 50 percent of the dollar amount of outstanding unsecured bond debt.

"Counsel for the Ad Hoc Committee has regularly reiterated that, in the absence of a settlement acceptable to bondholders, any bankruptcy case would be highly contentious and that litigation was likely to be initiated by creditors against Station Casinos and others," Station said in Friday's filing.

Station has already advanced retainers to Nave's law firms totaling $750,000 and to the Colony directors' law firm of $1 million; and has agreed to cover the costs of the attorneys for the Fertitta directors, the filing said. Additional costs for all the directors should be paid by Station as they are incurred, the company argued.

"Station Casinos Inc.'s directors are being asked to make numerous business determinations that materially affect the rights of stakeholders," Station argued in its court filing. "The directors should not be subjected to liability for their good faith decisions, and they have rightfully expressed an unwillingness to do so given the prior threats of litigation."

Friday's request is in addition to an earlier request that the court approve the hiring of these professionals:

--The law firm Squire, Sanders & Dempsey LLP as counsel to Station's "Special Litigation Committee to the Board of Directors." The committee was formed to investigate and deal with any potential claims, including "derivative claims," arising from the 2007 deal in which Station was taken private by Colony and the Fertittas.

Station hasn't spelled out the nature of any potential derivative claims. Such claims typically seek to force a company to sue its own board members to assert claims of mismanagement. Three such lawsuits involving Las Vegas Sands Corp. are pending in Clark County District Court in Las Vegas.

--Odyssey Capital Group LLC as financial advisor and investment banker to the special litigation committee. Station proposed that Odyssey review and analyze the going-private deal to determine if it was reasonable and review and analyze Station's solvency, on a going-concern basis, at the time of and following the transaction.

--The law firm Gibson, Dunn & Crutcher LLP as special counsel for certain lenders.

--FTI Consulting Inc. as financial advisor for certain lenders and Station.

--The firm Milbank, Tweed, Hadley & McCloy LLP as counsel for the Station debtors on bankruptcy, financial restructuring, corporate, tax, litigation and securities matters.

--Lazard Freres & Co. LLP as financial advisor and investment banker.

Also Friday, a group of independent lenders complained that Station and a key lender, Deutsche Bank, have improperly refused to pay for their legal expenses in the case up front.

The independent lenders consist of Bank of Hawaii, BNP Paribas, First Tennessee Bank, General Electric Capital Corp., Genesis CLO, Natixis, Castlerigg Master Investments Ltd., the Bank of Nova Scotia, Union Bank and U.S. Bank.

The independents spelled out their complaints in a motion seeking changes to Station's plan to spend cash during the bankruptcy process. Station's request for interim and final spending plans is due to be heard by the court during a Sept. 2 hearing.

The independent lenders complained Deutsche Bank is hopelessly conflicted as agent for a $900 million secured "OpCo" parent company loan agreement, which includes the independent lenders; and as a major lender in a separate $2.475 billion "PropCo" loan covering four of Station's 18 casino properties and a related "LandCo" loan.

Deutsche Bank "is not properly representing the interests of the OpCo lenders," the independents said in a court filing.

They said the current spending plan "drains cash from the OpCo structure to improperly subsidize the insolvent PropCo and LandCo structures."

"Under the debtors' proposal, the debtors have agreed to pay the fees and expenses of a legion of professionals -- at least seven so far for the debtors, plus even more for each of the various agents, including Deutsche Bank -- for a total 'budget' of more than $30 million for 13 weeks. But not a penny for the independent lenders, who share the same lien as Deutsche Bank," the independents complained.

"It does not take much imagination to see what the debtors and Deutsche Bank are doing here. By agreeing to pay, in cash, on a regular basis, the professional fees of all the parties that see eye to eye with them regarding the debtors' restructuring, the debtors and Deutsche Bank are hoping to 'starve out' the dissidents, like the independent lenders, in order to chill their opposition, by making them go out of pocket for their fees and expenses, while their opponents are subsidized by the (bankruptcy) estate," the independents charged.

The independents said they will deal with Deutsche Bank "at the appropriate time and place" and that they will eventually have their legal expenses reimbursed through the bankruptcy process. They said that by failing to pay them now, Station and Deutsche Bank are harming unsecured creditors by needlessly running up interest charges.

One of the independents, Natixis, said in its own filing that it and the other independents were rebuffed during the six months prior to the July bankruptcy filing in their efforts to engage Station, Deutsche Bank and a lenders' steering committee. The independents, Natixis said, tried but failed to work with other lenders in developing an acceptable capital structure for Station.

Now, Natixis charges, Station and Deutsche Bank are improperly attempting to divert cash they have an interest in to nonbankrupt subsidiaries so Station can pay interest on property loans.

Natixis says Deutsche Bank has up to $1.7 billion tied up in PropCo and LandCo loans but only $187 million at stake in the OpCo loan.

"The independent lenders' interest in the cash collateral is significant and wholly unclouded by competing interests in the other credit facilities. Deutsche Bank, on the other hand, weighed down by a stronger financial interest in the real estate credit facilities, has powerful incentives to approach this matter for its own benefit (to the detriment of the OpCo credit facility and the independent lenders), as evidenced by a proposed capital structure that heavily prefers the real estate credit facilities," Natixis complained.

Natixis accused Deutsche Bank of an "egregious abuse of its authority" in subordinating the interests of the OpCo lenders as Deutsche Bank protects its interest in the other two credit facilities.

"Deutsche Bank seeks to prejudice Natixis' rights in this bankruptcy proceeding based on Natixis' rightful decision not to fund debtor Station Casinos' credit request in December 2008," Natixis complained.

Natixis said that on Dec. 18, 2008, Station asked to borrow $257 million under a credit agreement, with Natixis asked to fund $8.7 million of that amount.

"Natixis did not fund that request because, at the time the request was made, multiple defaults existed under the credit agreement, including violation by the debtor of the maximum senior secured leverage ratio, and several incorrect or materially misleading representations by debtor," Natixis said in a court filing.

Station then went on to accuse Natixis of breaching the credit agreement by failing to fund its portion of the loan, Natixis said.

"Deutsche Bank -- which did not object to Station Casinos' wholly improper draw, to the serious detriment of the independent lenders who actually funded the request -- was at best negligent in honoring Station Casinos' request, and at worse, conspired with Station Casinos to facilitate the improper request to advance its own interests in the PropCo facilities," Natixis charged.

But attorneys for Deutsche Bank disputed the charges by Natixis and the other independent lenders.

Deutsche Bank argued the proposed spending plan, called a cash collateral order, "reflects a compromise and an effort by the parties to have this case proceed on a consensual basis in the interests of reaching a rapid resolution."

Deutsche Bank argued that during the 13-week budget period at issue, no cash collateral of the OpCo lenders will be used for payments to PropCo or for interest on the land loan.

The $2.475 billion PropCo loan covers four Station properties: Palace Station, Boulder Station, Sunset Station and Red Rock Resort, Deutsche Bank said.

There's a "general consensus" that the four properties are worth less than the $2.475 billion owed against them, Deutsche Bank. Yet, it's a "realistic goal" that Station Casinos can hold onto the properties once it comes to terms with the PropCo lenders, the bank said.

Deutsche Bank said that, as part of an ownership structure typical in sophisticated real estate transactions, the four hotel-casinos were set up as a group and Station leases them -- essentially from itself -- for $249.5 million per year. Station also covers their operating and maintenance costs, Deutsche Bank said.

And while Station owns and runs the four properties, they are encumbered by four layers of mezzanine debt financing.

Deutsche Bank said it doesn't make sense for Station to divert funds from these properties to the parent company and its lenders, since the PropCo assets currently can't meet all their debt obligations.

"There is no basis for a bankrupt company which is underwater on its debt to pay shareholder dividends during the course of its bankruptcy case," Deutsche Bank said.

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