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Best of Liz Benston

Gaming Guru

Liz Benston

Companies, lenders in delicate dance

5 November 2008

LAS VEGAS, Nevada -- In years past, casinos that filed for bankruptcy were doomed from the start.

Once they opened, the Stratosphere and the Aladdin, for example, weren't competitive enough to dig themselves out from under the piles of debt they took on in the beginning.

Circumstances today are different for the major casino companies and their lenders. These giants being squeezed by lower earnings and credit troubles are well-run companies that did what the market dictated two years ago, leaving them vulnerable to a downturn.

Companies were expected at the time to borrow hand-over-fist. Money was cheap and, with tourism and real estate riding high, their ever-bigger attractions could make huge profits to pay down the debt.

Now that the situation has changed, Wall Street lenders aren't about to let these companies off the hook for their poor judgment — even if Wall Street is also to blame for egging them on.

Just the same, the companies' projections were wrong.

Lenders and casino executives now find themselves on the same side of an epic consumer downturn.

This requires both parties to walk a fine line.

Banks are sympathetic to the difficulties confronting casino companies in this downturn.

Lenders "are going to be more willing to ride this out because they know it can't last forever," said Rudy Cerone, a New Orleans-based lawyer who has represented bondholders in riverboat casino bankruptcy cases.

And yet, the lenders — several banks in the case of bank loans and hundreds, even thousands, of bondholders in the case of corporate bonds — must also look out for their own.

Creditors will typically force a company into bankruptcy when they don't like how it's managed and fear they won't get paid.

These days, lenders aren't criticizing companies for poor management. Casino giants are still generating millions in profit, though that profit might be only 30 percent to 80 percent of what it was last year.

Most important, the giants are still making interest payments.

"You don't want to pick a fight with the guy who's still able to pay off his debt," said Frank Merola, a Los Angeles-based bankruptcy attorney who has represented casinos and creditors in Las Vegas.

Lenders can force a company into bankruptcy if it's not paying principal or interest, much like a home foreclosure. But a likelier scenario for big gaming companies involves a more circuitous route: Lenders can push for bankruptcy if a company has violated common financial terms, such as how much debt it has on its books.

Some gaming companies have tripped that wire and others are close.

By majority vote, creditors can formally declare a default and give the company time to resolve the problem, say, by cutting debt or changing the terms of the loan. If it isn't resolved by deadline, debtors can demand their money and go to court to get it.

That gives creditors extra leverage.

"Those lenders have shareholders who are watching them like hawks," bankruptcy attorney and UNLV Boyd School of Law professor Nancy Rapoport said. "If they feel the company is getting too good of a deal at their expense, shareholders are going to be after them."

Ultimately, however, creditors want to get paid rather than own or manage casinos, Rapoport said.

So for now, companies and lenders are working outside the courtroom to resolve their differences. These are private negotiations with groups seeking deals most favorable to them.

It's like a chess game.

"Your move at the beginning of the game could end up determining the outcome," Rapoport said. "The negotiations you make at the beginning might end up being good or bad for you at the end."