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Gaming Guru

Howard Stutz

Herbst Gaming faces tough choice

13 November 2008

LAS VEGAS, Nevada -- Herbst Gaming has until Dec. 3 to accomplish one of two tasks -- pay its bondholders more than $846.8 million or come up with a restructuring plan for the company's debt payments. Otherwise, the Las Vegas-based company will probably end up in bankruptcy court.

Herbst, which operates 15 casinos in Nevada and the Midwest and a 7,200-machine Nevada slot route business, said in March it was facing bankruptcy unless it could restructure the company's $1.2 billion debt. A negotiation period expired at the end of September but the bondholders granted an extension until Nov. 5.

In a filing with Securities and Exchange Commission on Wednesday, Herbst Gaming said it received a notice last week that its bondholders, who had put the company into default earlier this year, were demanding immediate payment of the outstanding principal on the loans. On Monday, the lenders agreed to give Herbst three weeks to make good on the payment or put forward a restructuring agreement.

"It sounds like the lenders are done talking," said one investment source familiar with the matter. "The bonds are trading so low, the lenders are willing to put the company into bankruptcy."

Herbst Gaming officials did not return phone calls for comment.

Wachovia gaming analyst Dennis Farrell Jr. said a bankruptcy filing seems to be the direction the company is heading.

"From a lenders' perspective, there has been tremendous decline in the valuations (of the bonds) and there is a continued weakness in the locals gaming market," Farrell said. "The question is what kind of equity value is in the Terrible's brand and the name."

Under terms of the bondholders' agreement, the lenders will stand aside and not demand payment but just for a short time.

Herbst Gaming, which is privately held by brothers Ed, Tim and Troy Herbst, but has public debt, began exploring strategic refinancing alternatives earlier this year with investment firm Goldman Sachs.

The company, which paid $394 million last year to MGM Mirage to acquire the three Primm Casinos, has seen its revenues fall dramatically this year. Revenues from Primm collapsed because high gasoline costs kept Southern California customers from making the drive along Interstate 15. Also, the Herbst slot route operations were heavily affected by a statewide ban that made smoking illegal where food is served.

Herbst lost more than $78.8 million in the first half of the year.

Most analysts who have followed the matter believe Herbst will have to sell several pieces of the company, including its casinos. The Herbst brothers may have to give up some control to an outside entity.