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Best of Howard Stutz

Gaming Guru

Howard Stutz

Herbst Gaming will split businesses

11 March 2009

LAS VEGAS, Nevada -- Herbst Gaming, which has spent the past year seeking a financial restructuring plan for its $847 million in debt, announced an agreement Tuesday with its bondholders in which the company will lose ownership of its 15 casinos in Nevada, Iowa and Missouri, but retain control of its Nevada slot routes.

Approximately 68 percent of the company's lenders under its senior credit facility signed off on the agreement, which calls for Herbst Gaming to be divided into two separate holding companies through a prepackaged bankruptcy filing.

Herbst Gaming general counsel Sean Higgins said the plan is expected to be filed with the U.S. Bankruptcy Court in Nevada on March 23, although the date could be extended. The restructuring is intended to convert Herbst's outstanding debt into a combination of new debt and equity in the two holding companies.

One holding company will own the casinos, including the three properties at Primm and the off-Strip Terrible's hotel-casino. The casino entity will be owned 100 percent by the lenders.

The second company, which covers the 600-location, 6,800-machine Nevada slot route operation, will be owned 90 percent by the three Herbst brothers. The lenders will control 10 percent of the business.

"We have been dealing with our lenders on this issue for a long time and this ends up being a good result," Higgins said. "The Herbst family will control the route and has the ability to rebuild that operation into a viable and profitable business entity."

Herbst Gaming was one of the first casino operations to run into the financial trouble that has now besieged the industry. Companies such as MGM Mirage, Las Vegas Sands Corp., Harrah's Entertainment and Station Casinos have all faced or are considering debt restructuring plans.

Herbst Gaming Chief Financial Officer Mary Beth Higgins said the company explored numerous alternatives, including casino sales.

"The group of assets made the most sense together," she said. "Peeling off any one or two didn't solve an issue. A comprehensive restructuring was required."

Higgins said gaming regulators in Nevada, Iowa and Missouri won't look at the restructuring until it is approved by the court, which could take about 120 days.

Until then, Herbst Gaming will run the casinos and slot machine routes without any changes.

"Our operations will continue as usual," Herbst Gaming Chief Executive Officer Troy Herbst said. "We will continue to make timely payments to our vendors. Our customers will not experience any impact from the restructuring and business will continue without interruption. This agreement allowed us to preserve over 7,300 jobs and that's a big one for us."

Because more than two-thirds of the approximately 135 lenders signed off on the restructuring agreement, Herbst Gaming should emerge from bankruptcy court as planned, company officials said. Once the legal proceedings are completed, gaming applications will be filed in Nevada for both the new casino company and the slot route company, and in Iowa and Missouri for the casino company.

When new gaming licenses are issued, potentially with a one-year time frame, the new casino owners will most likely bring in new management, Troy Herbst said.

"It's disappointing because we worked hard at building an outstanding business," Troy Herbst said. "Even now, our casinos and our routes are generating positive cash flow. They are making money. It's just the debt that has overwhelmed us."

Herbst Gaming began as a slot machine route operator, owning games in bars, taverns and restaurants throughout Nevada and sharing the revenues with the establishments' owners. The company grew substantially in 2007, spending $140 million to acquire five Northern Nevada casinos and spending $349 million to acquire Primm Valley, Buffalo Bill's and Whiskey Pete's from MGM Mirage.

However, a voter-enacted smoking ban inside taverns and restaurants sent gamblers to casinos and damaged revenues from the route operations.