LA Shop Loses On Station Casino Gamble

The prolonged recession and swelling unemployment rate are eating away at discretionary income and stacking the cards against many casino operators, including those backed by buyout shops.

Colony Capital, for instance, is one casino owner that’s learned that the house doesn’t always win.

The firm’s portfolio company, Station Casinos Inc., voluntarily filed for Chapter 11 bankruptcy protection on July 28—less than two years after the Los Angeles buyout shop teamed up with members of the founding Fertitta family to take the company private for $8.9 billion, including the assumption of debt. Colony Capital and Station Casinos did not return calls seeking comment.

Station Casinos operates 18 casinos and resorts. But unlike your typical Vegas casino that targets vacationers and conference attendees, Station Casinos specializes in providing gaming and entertainment for residents of the Las Vegas metropolitan area.

That unique focus could have served as somewhat of a recession buffer, given that the company is not tied to tourism like many of the other gaming spots in Sin City.

Unfortunately, the Las Vegas area was one of the hardest hit by declining real estate values. Combined with the credit crisis, increased unemployment and a decrease in consumer confidence levels, Station Casinos’ balance sheet was at the intersection of a perfect storm.

In the first quarter of 2009, each of the Station Casino’s gaming locations saw a decrease in activity. Net revenue during that period added up to $282.7 million, a 19.8 percent decline compared to the same period the year before.

Station Casinos had been in forbearance with the holders of a majority of its debt since March 2 after the company elected not to make interest payments on several of its credit facilities earlier in the first quarter of the year. Missed payments included:

• a $14.6 million service payment on its $450 million 6.5 percent senior subordinated notes due Feb. 1, 2014;

• a $15.5 million payment on its $400 million 7.75 percent senior notes due August 15, 2016;

• a $24.1 million payment on its $700 million 6.88 percent senior subordinated notes due 2016;

• a $9.9 million payment on its $300 million 6.63 percent senior subordinated notes due 2018;

• and a $13.5 million payment on its $450 million 6.0 percent senior notes due 2012.

In a public letter posted on the company’s Web site, Station Casinos CEO Frank Fertitta III, said the casino operator’s bankruptcy filing was an “unprecedented” and “necessary” step “to preserve and ultimately strengthen our company.”

The company has entered into an agreement with senior secured lenders allowing it to borrow up to $150 million via a revolving credit facility so long as the business is able to maintain at least $100 million in cash and cash equivalents on hand. All of the company’s casinos will operate as usual while Station Casinos is under bankruptcy protection.

Meanwhile, longtime suitor Boyd Gaming Corp., which in February submitted a non-binding preliminary indication of interest with respect to acquiring Station Casinos for about $950 million, continues to display a public interest in the company. Boyd Gaming CEO Keith Smith, reportedly told analysts earlier this month that despite his own company’s 60 percent drop in its adjusted profit for the second quarter, he is still interested in pursuing a deal.

For its part, Colony Capital, which acquired Station Casinos in November 2007, appears to be leaning toward giving the gaming industry a break—at least for the time being. In April, the firm reportedly ended talks with MGM Mirage over a potential investment in the struggling gaming company.

Station Casinos’s trip into bankruptcy filing follows those of casino operators Trump Entertainment Resorts Inc, based in Atlantic City, N.J., and the Las Vegas Tropicana.

Harrah’s Entertainment, meanwhile, which is backed by Apollo Management and TPG, continues to struggle under aheavy load of debt related to its $31 billion buyout. Revenue at the company declined 12.7 percent in the second quarter from the same period in 2008, while EBITDA declined 9.4 percent from the prior year, according to a regulatory filing.