The current economic recession has, not surprisingly, led to a significant downturn in the domestic gaming industry. During 2008, revenue growth in the U.S. gaming industry turned negative for the first time in four years. Data for the first quarter of 2009 indicate that the monthly gaming revenues of casinos in Las Vegas and Atlantic City declined more than 15% as compared to the first quarter of last year.1 Public gaming company stock prices are down more than 80% on average, and many gaming companies have postponed or canceled development projects. Industry analysts have predicted that a “meaningful recovery” in the gaming industry is “unlikely until 2010.”2
In light of current market conditions, gaming companies are developing and implementing strategies to meet their debt obligations and rehabilitate ailing operations. Additionally, potential investors may view the declining market as a buying opportunity. The first half of this article examines available strategies for gaming companies facing insolvency or a liquidity shortage. The second half of this article, which will run in the next issue of the Restructuring Review, will detail how potential buyers can acquire a gaming asset in bankruptcy, paying particular attention to the asset sale provisions of section 363 of the Bankruptcy Code.
Out of Court Solutions for Distressed Companies
It is often preferable for a distressed company to resolve financial issues with its various creditor constituencies without filing for bankruptcy. A filing involves significant costs and uncertainty, and brings unwanted publicity and additional legal issues to resolve.
Understanding non-bankruptcy options is thus essential to navigating the out-of-court process.
Several U.S. gaming companies have recently considered or sponsored debt exchange offers. If structured properly, debt exchanges can benefit both corporate issuers and their noteholders. For example, during the past five months Harrah’s Entertainment, Inc. (“Harrah’s”) completed two separate debt-for-debt exchange offers under which classes of outstanding unsecured notes were exchanged by Harrah’s at a discount for new secured notes. Through these exchange offers, Harrah’s reduced its outstanding corporate debt by approximately $2 billion.3 In addition, the exchange offers allowed Harrah’s to retire notes expiring in 2010 and 2011 in exchange for new notes maturing in 2015 and 2018.4
From the noteholders’ perspective, exchange offers are attractive because eligible participants typically improve their collateral position by swapping unsecured debt for new secured debt. Noteholders also often receive significant interest rate increases. From the company’s perspective, exchange offers allow a company to de-lever and postpone near-term maturities until the company and the market stabilize.
Although the potential to reduce outstanding debt and extend maturity dates makes debt exchanges an attractive option for gaming companies, it is important to note several limitations on this out-of-court strategy. First, restructuring companies cannot guarantee bondholder participation in an exchange offer. For example, Station Casinos, Inc., which operates 18 casinos in the Las Vegas area, was forced to terminate a debt-for-debt exchange offer in December 2008 due to lack of participation.5 In addition, the creation of additional secured debt under exchange offers often encumbers previously unencumbered assets, or in the case of the Harrah’s exchanges, creates second priority liens that reduce the company’s “equity cushion” on previously encumbered assets. Although this may seem costless at the time of restructuring, it can prove detrimental in a future bankruptcy. The foregone equity cushion could have provided secured creditors with adequate protection for the use of cash collateral under section 363 of the Bankruptcy Code or in the context of obtaining debtor-in-possession financing. Creating new secured debt also increases the number of parties that must receive “fair and equitable” treatment under the terms of any reorganization plan.6
Selected Asset Sales
Gaming companies attempting to de-lever or generate cash may also engage in strategic asset sales. For instance, MGM Mirage recently sold the Treasure Island Hotel & Casino for $500 million in cash and $275 in short term secured notes.7 It has since announced that it plans to sell additional assets in Michigan and Mississippi to further boost liquidity.8
From the company’s perspective, asset sales offer immediate cash and may increase lender confidence with respect to the company’s ability to comply with the terms of existing credit agreements. However, these sales also diminish future revenue streams. The MGM Mirage facilities currently for sale in Michigan and Mississippi have “produced steady revenue in an otherwise slumping market.”9 Selling at the bottom of the market therefore may be a shortsighted fix to long-term viability issues. Furthermore, the current constrained credit markets, coupled with state licensing requirements for operators of gaming facilities (which will be examined in the next issue of the Restructuring Review), substantially limit the number of potential buyers for these assets and thus potentially depress the ultimate purchase price.
Renegotiating Terms of Existing Indebtedness
A gaming company, like any other company, may also generate liquidity and breathing room by renegotiating the terms of its outstanding debt. This out-of-court strategy is limited principally by the amendment and waiver provisions in most loan agreements. While these provisions vary by agreement, the consent of all or a significant portion of a company’s lenders is generally required for any amendment that materially alters the rights of lenders under the agreement. Out of court, the requirement of unanimity or a supermajority vote gives holdout creditors great leverage.
In recent months, a number of gaming companies modified covenants and events of default under their loan agreements.10 For example, Ameristar Casinos, Inc., which controls eight gaming facilities in six states, recently secured amendments to its November 2005 credit agreement that increased permitted leverage ratios to avoid a future default.11 The amendments also removed limitations on the company’s ability to issue senior unsecured notes, while increasing the amount of permitted capital expenditures, and allowing the company to obtain incremental term loans.12
Other recent amendments have waived or modified restrictions on the ability of gaming companies to purchase outstanding corporate debt or to obtain new loans. In November 2008, Wynn Resorts, Ltd. (“Wynn”) executed a second amendment to its June 2007 credit agreement, which allowed the company to purchase up to $650 million in outstanding corporate notes.13 Wynn received “additional flexibility to incur incremental secured debt” in connection with the development of Encore, a new hotel-casino gaming facility adjacent to the Wynn Las Vegas through a third amendment secured in September 2008.14 Likewise, the Las Vegas Sands Corp. recently announced an amendment to its May 2007 credit agreement allowing the company the option to buy back up to $800 million in outstanding term loans.15 Las Vegas Sands Corp. could exercise this option to improve its balance sheet or ensure compliance with leverage ratio covenants. Often when a company is in distress, retiring outstanding indebtedness, as opposed to obtaining additional equity infusions, is a preferred course of action.
Finally, MGM Mirage announced an amendment to its senior credit facility on May 13, 2009. The amended agreement allowed the company to commence a public offering for 81 million shares of its common stock, which is expected to raise approximately $1 billion.16 The amended agreement also allowed MGM Mirage to begin a private placement of $1.5 billion in senior notes with 2014 and 2017 maturity dates. The senior notes are secured by substantially all of the assets of the Bellagio Hotel and Casino and the Mirage Hotel and Casino.17 The proceeds of the common stock and debt offerings will be used to repay outstanding debt under the company’s senior credit facility, purchase or repay certain senior notes due 2009, and redeem certain senior debentures.18
Gaming Companies in Chapter 11
Several troubled gaming companies have been unable to stave off bankruptcy and have instead commenced chapter 11 cases. Filing for bankruptcy may be an attractive alternative for a number of reasons. The commencement of a chapter 11 case triggers the automatic stay under section 362 of the Bankruptcy Code, which enjoins virtually all actions against the debtor or the debtor’s property. The actions stayed under section 362 include any act to obtain or exercise control of the debtor’s property and any act to collect, assess, or recover a claim against the debtor that arose before commencement of the bankruptcy case. Section 365 of the Bankruptcy Code allows the debtor to reject certain undesirable leases and contracts on which performance has not been completed, and section 1113 of the Bankruptcy Code allows the debtor to reject a collective bargaining agreement, following good faith negotiations with union representatives, or to propose “necessary” modifications to the agreement.19
Chapter 11 also offers gaming companies the ability to restructure and reduce outstanding debt. The restructuring plan submitted by Tropicana Entertainment LLC (“Tropicana”) is illustrative. Tropicana’s restructuring plan generally provides for senior secured debt to be converted to common stock, unsecured debt to receive warrants and interest in a litigation trust, and common stock and other equity interests to be eliminated without a distribution.20 It will also be funded by $150 million in exit financing from Icahn Capital LP.21 The Bankruptcy Court recently approved the plan, which will eliminate approximately $2.4 billion in outstanding debt and will allow Tropicana to pursue the approval of the gaming authorities in those states where it plans to continue operating gaming facilities.22
Herbst Gaming Inc. (“Herbst”), which operates casinos in Nevada, Missouri and Iowa, filed for bankruptcy protection in Nevada in late March 2009. Herbst negotiated a restructuring agreement with its secured lenders prior to filing. However, the plan has yet to be approved by the bankruptcy court, and it is currently uncertain whether Herbst will be reorganized pursuant to the terms of this prepetition agreement.
Trump Entertainment Resorts, Inc. (“Trump”), which controls three facilities in Atlantic City, also filed for bankruptcy protection in New Jersey in February 2009. According to its bankruptcy filing, Trump and its affiliated debtor entities had $2.1 billion in total assets and $1.74 billion in total debts as of December 31, 2008.23 Trump hopes to consummate a sale of its Trump Marina Hotel Casino for $270 million in May 2009.24
The process through which gaming facilities may be acquired in bankruptcy, and the state law licensing requirements that complicate the acquisition of this type of asset, will be examined in detail in the next issue of the Restructuring Review.