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September 21, 2019

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Station Casinos: No competitive advantage under bankruptcy plan

Attorneys for Station Casinos Inc. of Las Vegas and its key lenders are defending the company's bankruptcy reorganization plan, saying a group of five hotel-casinos won't be at a competitive advantage to 13 more properties should the other 13 be picked up by another buyer.

Under Station's plan, Station executives Frank and Lorenzo Fertitta and Station co-owner Colony Capital of Los Angeles would have an ownership stake in and would manage Station's five "PropCo" properties: Red Rock Resort in Summerlin, Sunset Station in Henderson and Boulder Station, Palace Station and the Wild Wild West in Las Vegas.

Thirteen more properties such as the two Fiestas, Texas Station and Santa Fe Station would be auctioned by the bankruptcy court with the proceeds paying some of the claims of creditors. The Fertittas, Colony and the PropCo lenders plan to bid for Station's interest in the 13 OpCo properties as the "stalking horse" bidder.

Bondholders and other unsecured creditors, independent bank lenders and competitor Boyd Gaming Corp. have been attacking the Station plan as favoring the insiders and are likely to continue doing so during bankruptcy court hearings in Reno May 4 and 5. Billions of dollars are at stake in the case as the Fertitta/Colony proposals value the company at about $2.572 billion, while its debts and liabilities were last reported at $6.6 billion.

In a filing Monday, the bondholders asked Judge Gregg Zive to allow competing plans of reorganization to be filed so that creditors can recover more money than what is proposed by the Fertittas, Colony Capital and key lenders Deutsche Bank and JPMorgan Chase Bank.

"The debtors have been given several chances to put forth a good faith plan that benefits all creditors to whom they owe a fiduciary duty. The debtors have not used those opportunities to make progress through substantive negotiations with the vast majority of Station Casinos' creditors. Rather, they have offered sham auctions, one sided 'compromises' and conclusory, opaque rationales for their proposed actions," the bondholders' attorneys argued.

For instance, they charged: "Station Casinos has agreed to give the Fertitta brothers the opportunity to buy all remaining Station Casinos assets for a set price that all third-party bidders are required to top despite the fact that third-party bidders cannot buy the assets that are being stripped away from Station Casinos and handed to reorganized PropCo."

But should the Fertittas, Colony Capital, Deutsche Bank and JPMorgan Chase be unsuccessful in acquiring the 13 "OpCo" casinos, several of which have hotels, the successful OpCo buyer would not be at a disadvantage in competing with the PropCo properties, Station attorneys said in a court filing Wednesday.

Creditors opposed to the plan say it's been designed to strip away valuable information technology and intellectual property assets and give them to PropCo, leaving OpCo unable to successfully compete.

That's not the case since the PropCo properties don't compete with the OpCo properties, Station said in its filing.

"Station Casinos' management has strategically placed each casino so that each Station Casinos-managed casino has its own local geographic market," Station's filing said. "In view of their geographical and market separation, it is specious to argue that PropCo, once it acquires assets necessary to be able to continue operating, will somehow cannibalize the other Station Casinos-managed casinos. Moreover, the revised agreement does not provide for PropCo to acquire competitive information regarding the Station Casinos-managed casinos."

Station's attorneys and attorneys for PropCo lenders Deutsche Bank and JPMorgan Chase argued the deal has numerous protections for OpCo's operations including payment to OpCo of $35 million for certain assets to be transferred to PropCo, assumption of $13 million in OpCo liabilities, OpCo's retention of branding features for websites, PropCo's receipt of customer lists only for those customers whose primary casino play is at a PropCo casino, a plan that OpCo receive an appropriate information technology system and an agreement that corporate employees be reasonably allocated between the two companies.

"OpCo will not be pillaged by PropCo in the event the amicable divorce comes to pass: PropCo cannot raid OpCo of its senior management, and OpCo will have operational IT systems. The agreement neither unfairly discriminates against OpCo nor unjustly enriches PropCo as if PropCo were a direct competitor of OpCo," the Station filing said.

While the unsecured creditors including bondholders owed $2.5 billion and a group of independent lenders believed to hold less than 20 percent of the OpCo bank debt have objected to the plan, Station noted its reorganization plan is supported by holders of most of its secured debt.

"The creditors who stand to gain or lose the most over any shifts in value between PropCo and OpCo not only support the approval of the revised agreement, but were, in fact, active participants in the negotiation of the revised agreement," Station said in its filing.

Attorneys for two of the key secured lenders, Deutsche Bank and JPMorgan Chase, also filed papers Wednesday supporting the reorganization plan.

"The amended compromise strikes a critical balance to ensure that OpCo and PropCo will each remain fully operational post-emergence (from bankruptcy), even if they do not remain commonly owned," the bank attorneys said in their filing.

While some creditors have charged the reorganization plan is part of a scheme by the Fertittas to retain control of all of Station at the lowest possible price, the PropCo lenders called that argument "fanciful."

Deutsche Bank and JPMorgan -- known in the cases as the CMBS (commercial mortgage-backed securities) lenders -- are the driving force behind the plan, their attorneys said. That's because they hold the $2.475 billion mortgage to four of Station's most valuable properties: Red Rock and Sunset, Boulder and Palace stations.

"The CMBS lenders are the principal stakeholders of PropCo and will, at the end of the day, own the PropCo casinos, whether through the (reorganization) plan or otherwise. The CMBS lenders will require an operator to run their casinos and have selected Fertitta Gaming because they believe Fertitta Gaming will do the best job managing these properties post-(bankruptcy) emergence. It is that simple," the bank attorneys said. "The CMBS lenders also insisted that Fertitta Gaming purchase a stake in the entity which will ultimately own the PropCo casinos post-emergence so that Fertitta Gaming’s economic interests will be aligned with the CMBS lenders’ interests as owners.

"For the very same reasons, the CMBS lenders have insisted that Fertitta Gaming invest alongside the CMBS lenders in offering to acquire the OpCo assets through the stalking horse bid," the attorneys said.

Also, attorneys for Deutsche Bank, the agent for OpCo lenders owed $900 million, said in court papers the bank discussed the sale of the OpCo assets with Boyd Gaming and other potential "strategic buyers" and that the Fertitta/Colony offer initially came in at $635 million, but was later raised to $772 million including $317 million in cash.

The attorneys for Deutsche Bank said the Steering Committee of OpCo lenders holding more than 60 percent of the OpCo debt selected the Fertitta/Colony offer as the "highest and best" stalking horse bid for OpCo.

Station filed for Chapter 11 reorganization last summer after the recession reduced spending at its properties and it was unable to meet debt obligations.

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