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May 19, 2019

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Lenders want study on Station’s rejection of Boyd, other issues

Minority lenders in the Station Casinos Inc. bankruptcy case asserted new allegations Tuesday, charging conflicts of interest and asking why Station continues to reject Boyd Gaming Corp.'s bid to buy certain assets.

The banks, called the Independent Lenders to Station Casinos, asked the court to appoint an examiner to study these and other issues.

Tuesday's motion is separate from motions that were covered Wednesday at a hearing on the case in Reno.

Since Station filed for bankruptcy protection in July, the independent lenders have complained the company's main lender, Deutsche Bank, is 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 $250 million "LandCo" loan.

In their filing Tuesday, attorneys for the independents charged that Station management, too, is conflicted as it governs properties encumbered by the three separate loan agreements.

The independent lenders and the unsecured creditors committee have complained that under a structure put in place when Station was taken private in 2007, Station's four "PropCo" casinos have been consuming cash with an arrangement in which Station rents the properties from itself for $249.5 million per year.

They say that cash has been used to make payments on the $2.475 billion loan -- at the expense of creditors and lenders not involved in the "PropCo" mortgage.

The independent lenders are also complaining about cash being used to make payments on the $250 million land loan.

"While the 'three-stack' debt structure probably worked well when each 'stack' was solvent back in 2007, it no longer works in today's environment, when each 'stack' is insolvent and common management has the ability to move value among the different 'stacks,'" the independents complained.

"While management is the same for all three insolvent stacks, the creditors are not," the lenders' filling said.

Before the bankruptcy, management "freely acted on behalf of all three stacks, and engaged in transactions that transferred funds from one stack to another," it said.

"Now that the stacks are insolvent, such transactions have the potential to unfairly, and improperly, shift value from one stack to another, and thereby benefit one stack's creditors at the expense of another," the filing said.

The lenders said Station management, for example, has not moved to have the court cancel or modify the deal in which Station leases the "PropCo" casinos from itself, with the funds used to pay the mortgage. Since the loan is "underwater" -- the four casino-hotels are believed to be worth less than the mortgage -- it would make sense to modify its terms and the rental arrangement, the lenders said.

The PropCo properties are Palace Station, Boulder Station, Sunset Station and Red Rock Resort.

"Since OpCo and PropCo have common management, when considering what to do about the lease, management is presented with a 'Sophie's Choice': which child should suffer? Management's answer, predictably, is 'neither.'

"And this is exactly what we have seen so far: Station Casinos and OpCo continue to pay the over-market lease rent at the rate of almost $21 million per month," the lenders charged.

The lenders also complained about Station's decision not to entertain an offer by Boyd Gaming to buy all or part of the company.

The lenders said that Station's rationale for not dealing with Boyd six months ago -- that it was trying to negotiate a pre-packaged bankruptcy agreement with lenders -- is now moot.

"Obviously the pre-pack ... never happened. Moreover, notwithstanding the hopeful statements made by certain parties at the first-day hearing in this case, there is no real consensual plan in prospect now," the lenders attorneys wrote.

"Boyd, meanwhile remains interested," they wrote. "To the knowledge of the Independent Lenders, however, the debtors continue to deny Boyd any access to due diligence and refuse to entertain any offer to sell their assets -- their creditors' assets -- to qualified third parties.

The lawyers said an examiner "unencumbered by the debtors' internal conflicts of interest needs to fully and fairly consider the benefits to OpCo's creditors of a third-party transaction like that proposed by Boyd."

The lenders also complained about:

--What they called Station's plan to pay more than $4 million for 13 weeks of interest and insurance on the $250 million land loan that the lenders say is underwater because the property is worth less than the debt. Instead of paying more on the loan, it would make more sense for Station to give the land to the mortgage holders or have the non-bankrupt subsidiary holding the land file for bankruptcy, the minority bank lenders argued.

--What they called excessive spending planned by Station and Deutsche Bank on attorneys and other professionals in the case totaling $2.5 million per week.

--What they call the proposed spending of creditors' money -- $30 million over 13 weeks -- by Station on speculative development deals including proposed Indian casinos.

Station and Deutsche Bank have not yet responded to the independents' call for the appointment of an examiner, for which the independents requested a Sept. 30 hearing.

A key issue likely to be raised is the unspecified expense of appointing an examiner.

"Any such newfound concern about 'cost' on the debtors' part would ring hollow, given the debtors' willingness to have OpCo pay professionals engaged to represent OpCo's adversaries, i.e., PropCo and its secured creditors," the independents' filing said.

"Unlike many of the professional fees that the debtors are willing to foist on OpCo, having OpCo pay an independent, non-conflicted third party to evaluate whether OpCo's economic interests are being unfairly sacrificed for the benefit of PropCo or LandCo, is an investment that will likely produce economic value for OpCo and its discrete creditor constituencies," the filing said.

The independent lenders include Bank of Hawaii, BNB 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.

Their call for the appointment of an examiner was preceded by the unsecured creditors' committee revealing it's investigating the structure of Station's loans and the 2007 going-private deal. The unsecured creditors have suggested the leveraged-buyout deal and the resulting capital structure are now wrongfully diverting cash from creditors.

Deutsche Bank has disputed these suggestions and notes the bankruptcy of Station followed "the supervening and unanticipated event of an economic meltdown unmatched since the Great Depression."

Station's casinos and hotels remain open during the bankruptcy process.

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