Las Vegas Sun

September 19, 2019

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Owning, operating casinos not first choice of lenders when loans can’t be repaid

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Gamblers play craps at the opening of M Resort in March 2009. In a deal announced Friday, Penn National Gaming acquired M Resort's $850 million debt for $230.5 million.

It’s a scenario many Las Vegas homeowners can readily identify with: Casinos that owe more than their buildings are worth and can no longer afford their debt payments are facing off with lenders who want to recover as much money as possible on ill-timed loans.

But selling a casino for cents on the dollar to satisfy lenders is a lot more complicated than selling your house — or just about any commercial property.

For one thing, Nevada law requires that investors get licensed before they can take over a casino — a lengthy and intrusive process that involves poring over private financial records and interviewing friends and business associates to determine the applicant’s solvency and integrity. In some cases, lenders who foreclose on bankrupt casinos can avoid the licensing process by having trustees sell the properties. They can also hire management companies to step in temporarily. Still, investors acquiring a casino must be licensed if they want to receive a share of casino profit or have a role in management — a prospect that’s not worth the aggravation for most lenders.

And casino owners and lenders are grappling with a more fundamental problem: how to value the properties.

What might be a straightforward sale in another industry is not so simple for a Las Vegas casino — a business whipsawed harder than most by the recession.

Some business sectors have begun a slow recovery since the nation officially exited the recession, but the casino industry is still in flux. Analysts expect a rebound next year, but reported figures still show declines in overall earnings for major casino operators. Gaming Control Board figures show continued declines in gambling revenue, although it appears to be bottoming out as the rate of decline slows. Locally, off-Strip gambling revenue, the hardest hit by the mortgage crisis, continues to slide. Strip revenue is also down from last year with the exception of baccarat, a game favored by Asian high rollers who aren’t as affected by U.S. economic troubles.

Figures released Friday may indicate a turnaround, as statewide gambling revenue in August grew 6 percent from a year ago without including revenue from baccarat. The increase is 12 percent when baccarat is counted.

Visitor traffic is up 2 percent this year, bolstered in part by cut-rate prices for hotel rooms and other amenities. But the masses aren’t spending what they used to.

Bond-rating agency Moody’s Investors Service put it this way in a July casino industry report titled “Proceed With Caution”: “While sharp declines in U.S. monthly casino revenue have started to subside, there is a high degree of uncertainty over when gaming trends will improve from current levels, and if they do, how sustainable those improvements will be.”

Moody’s said it expects gaming company profits to stabilize by the end of this year, as business “bottoms out” and gambling revenue flattens relative to a year ago.

Before that happens, though, experts say deals will probably be few and far between — even for properties that can no longer pay banks and other lenders what they are owed. “There has been minimal casino transaction volume since gaming demand trends remain depressed, particularly in Las Vegas,” said Michael Paladino, a senior director at bond-rating agency Fitch Ratings.

By contrast, sales of nongaming hotels have picked up in recent months following evidence that a recovery in that industry is gaining traction, he said. The recovery, he said, has made the business more predictable and enabled more deals by narrowing the spread between what buyers want to pay and at what price sellers will accept.

Although lenders may be unwilling to unload casinos at fire sale prices, buyers are more risk averse these days and typically seek a return of more than 20 percent on their money, said Jacob Oberman, director of gaming research and analysis for CB Richard Ellis in Las Vegas.

“Every potential buyer is going to have a different opinion on when we’re going to see (earnings) start to grow again in Las Vegas,” Oberman said. “Then it comes down to how fast it’s going to grow and what kind of financing can you get for an acquisition. Banks are going to be tentative in this market. Even if the acquirer is anticipating growth, a bank may not be willing to make that assumption.”

M Resort, which struggled to make debt payments shortly after it opened in March 2009, is an example of a simple transaction that still took longer than one might expect given the depth of the property’s financial troubles.

The $1 billion resort, conceived when times were flush, opened to big crowds that tapered off as the economy worsened.

After more than a year of nonpayment on a $700 million loan, British banking giant Lloyds Banking Group began soliciting buyers for the debt as an alternative to the time and expense of acquiring the resort by forcing it into foreclosure or bankruptcy. In a deal announced Friday, Penn National Gaming acquired M Resort’s $850 million debt for $230.5 million. The deal gives Penn the right to own and operate the property given that the equity owned by the Marnell family, who built the resort, is negligible. The bank is walking away from the property with some recovery on its loan, letting those who know the business running the casino.

Thus, the holding pattern that underwater casinos are in. Rather than giving operators the boot and taking over the properties, lenders have given concessions on those loans. This also gives lenders more time to gauge whether a sale makes sense and at what price.

Las Vegas Hilton’s lender, for example, amended the property’s $230 million loan in July to increase the principal by $22 million and advance the Hilton additional cash for unpaid interest.

Hooters resort has not made interest payments on its $130 million loan for more than a year, although lenders have agreed to hold off on foreclosure or bankruptcy. The property’s debt — which can be bought and sold just like a stock — has traded hands among investors who may seek short-term profit rather than the opportunity to own and operate a casino.

Nor are lenders taking over Aliante Station and Green Valley Ranch Station — both in financial straits that are not part of the bankruptcy case involving most properties owned by Station Casinos, as they were separately financed.

Rather, these lenders are analyzing what the properties are worth — a first step in a potential sale process that would whittle down the properties’ debt to a more manageable level.

(The properties are owned in partnership with the Greenspun family, which owns the Las Vegas Sun. Both ownership parties declined to comment on the negotiations.)

Valuing casinos has always been a challenge given how few properties, and thus sale opportunities, exist relative to other industries, said Glenn Christenson, former chief financial officer of Station Casinos and a managing partner of Velstand Investments.

It’s more difficult now because experts aren’t sure what level of earnings is normal for casinos, which are valued based on earnings and sold in the range of six times annual cash flow years ago to more than 10 times cash flow during the market peak, Christenson said.

Strip giants MGM Resorts International and Harrah’s Entertainment avoided bankruptcy by negotiating to postpone, lower or otherwise obtain more breathing room to afford unwieldy debt payments. Each has reduced its debt by millions of dollars and has been making payments on its loans. In some instances, Harrah’s has boosted its loan principal in lieu of payment.

The silver lining for Las Vegas casinos, the tens of thousands they employ and the community at large is that poorly performing casinos can make money once debts are under control.

Unlike the many foreclosed homes that sit empty, casinos have historically been too lucrative to shut down. By forgiving some of a casino’s debts, taking ownership of a property or selling their interest to someone else, lenders are allowing casinos to operate as usual and to make what money they can.

For loans owned by multiple tiers of investors, the first step toward an agreement on what a property is worth can be a challenge. That’s why some companies may be forced to enter bankruptcy as the only way to ensure agreement — structured by majority vote — among many stakeholders.

Some lenders holding a first lien or mortgage on a casino may think they can get more out of their investment if they hold on rather than sell now. On the other hand, without a significant recovery on the horizon, they may seek to cut their losses and move on to the next deal.

“Wall Street money isn’t patient,” one potential casino buyer said.

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