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October 15, 2019

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Creditors want to expand probe of Station Casinos deal

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One day before a key hearing in Station Casinos Inc.'s bankruptcy case, a creditors committee has signaled its intention to widen an investigation into the 2007 deal in which the Las Vegas company was taken private for $5.7 billion.

Since the Las Vegas locals gaming leader filed for bankruptcy protection July 28, creditors have focused on the 2007 deal because of concerns the transaction has and continues to divert funds away from certain creditors to Station, its insiders and its key lenders led by Deutsche Bank.

With the recession reducing business at its 18 locals gaming properties, Station defaulted on debt obligations and then filed for Chapter 11 bankruptcy reorganization after creditors couldn't agreed among themselves on a pre-packaged bankruptcy plan.

Under that plan, lenders would have made concessions and Station owners Colony Capital of Los Angeles and the Fertitta family would have pumped in additional capital of $244 million to beef up Station's balance sheet.

In a court filing Wednesday, attorneys for the case's Official Committee of Unsecured Creditors updated their investigation of the 2007 going-private deal.

The Special Litigation Committee of Station's board of directors has studied the deal and found it was not successful because of the recession, not because of its terms. Member of the founding Fertitta family and Colony Capital acquired the company in a deal that boosted Station's debt by $1.6 billion.

But the creditors committee said in its report Wednesday the Station internal investigation didn't cover key points and was based on some flawed assumptions.

The creditors committee reported Wednesday it's:

--Considering asserting "fraudulent transfer claims" in the case, which would be aimed at canceling some or all of the debt associated with the going-private transaction so more cash and assets can be recovered by creditors not involved in the deal.

--Considering an examination of title insurance companies involved in the deal.

--Considering filing predatory-lending claims against Deutsche Bank, Station's lead lender.

A key allegation asserted by creditors is that Station relied on unrealistic, rosy financial assumptions in taking on the additional debt -- and that the effect of the deal was to transfer risks of the leveraged buyout (LBO) from shareholders to creditors.

"The committee believes that there is already substantial documentary evidence to suggest that the projections prepared in October 2007 that apparently were used in the LBO transaction were unreasonably optimistic," the creditors said in Wednesday's filing, adding an analysis for the October 2007 deal was based on projections prepared in late 2006.

"The Special Litigation Committee did not address in any meaningful way the fact that insiders, who stood to make nearly $1 billion if the LBO transaction closed, never altered the pricing of the LBO transaction in light of the changing economic climate," the filing said.

The creditors said the value of Station used to justify the LBO price and the additional debt may have been inflated with an unjustified level of goodwill -- an intangible asset representing the ability of the Station brand to produce future revenue and profit.

Goodwill and intangible assets after the deal totaled $3.966 billion, up from $155 million before the LBO. But after the recession, the company's goodwill and intangible assets are now valued by Station at just $926 million.

As for Deutsche Bank, the committee likened its conduct in the case to Credit Suisse Group, which was accused in the notorious Yellowstone Club bankruptcy case in Montana to have encumbered the debtor with an unsustainable level of debt in order to earn fees -- and is accused of doing the same thing in the Lake Las Vegas bankruptcy case.

"The committee is attempting to analyze whether there are any valid equitable subordination claims against Deutsche Bank, given its role in providing both financial advisory and lender services to Station Casinos," the Station creditors' filing said. Equitable subordination claims could cancel some of the Station debt owed to Deutsche Bank.

Noting the Yellowstone Club case included assertions Credit Suisse was motivated to earn substantial fees, loaded the debtor with too much debt and shifted the risk of loss to unsecured lenders, the Station creditors said: "The committee is investigating whether Deutsche Bank engaged in any similar conduct."

A key issue in the case is a provision in which four of Station's most profitable properties were spun off into a company called PropCo and were encumbered by $2.475 billion in debt. Station now pays PropCo $250 million per year to lease those properties. Creditors are attacking the mortgage and lease, saying they're unrealistic given the value of the hotel-casinos has declined due to the recession.

Station has said it's studying potential modifications to the lease and this week the company sought bankruptcy court approval to hire Global Gaming & Hospitality LLC to assist in its study.

The unsecured creditors also said in Wednesday's filing they plan a "Rule 2004" examination of title insurers that underwrote the PropCo loans.

Such and examination could be wide-ranging, covering the acts, conduct, property, liabilities and financial condition of PropCo and Station.

Friday's hearing in Station's bankruptcy case before Judge Gregg Zive in Reno is expected to cover:

--Station's request that its exclusive period to file a reorganization plan be extended four months from Nov. 25 -- a request competitor Boyd Gaming Corp. wants conditioned on Station cooperating with Boyd in allowing Boyd to conduct due diligence for an expected bid to buy all or part of Station.

--A request by a group of independent lenders that an examiner be appointed to study Station's going-private deal and its finances; and to facilitate the possible sale of assets so creditors can recover some of the money owed to them.

--A request by the unsecured creditors that they be allowed to hire Sierra Consulting Group LLC to assist in their investigation.

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