Station Casinos files for Chapter 11

30.07.2009, Company will continue normal operations with existing management

Las Vegas locals gaming leader Station Casinos Inc. and certain subsidiaries filed for a standard Chapter 11 bankruptcy reorganization Tuesday after Station was unable to reach agreement with creditors on a prepackaged bankruptcy deal.

The lack of an agreement with creditors means a plan for the controlling Fertitta family and private equity company Colony Capital to invest more money in the company in exchange for concessions from lenders is off the table for now -- and that the court will sort out the future of the company's assets and debts.

Colony and the Fertitta family took Station private in 2007 in a leveraged $8.7 billion deal that later came under stress when the economy moved into recession -- reducing revenue for Station just as the company faced higher interest costs to finance the takeover.

Los Angeles-based Colony Capital issued a statement Tuesday offering no details on how the company may be restructured, but offered hope that the process "will culminate in a new beginning for a solid, well run business."

Station officials said that under the leadership of Chairman and Chief Executive Frank Fertitta III, they intend to file a reorganization plan that will put the company in a position to capitalize on the opportunities in Las Vegas once the economy turns around.

"Our goal is to keep the company intact" with a stronger capital structure, said Kevin Kelley, Station's chief operating officer.

Bill Lerner, an analyst for Union Gaming in Las Vegas, said the bankruptcy filing will give Station more time to negotiate with lenders. Under bankruptcy law, Station likely will have several months to exclusively propose a plan of reorganization.

After that, creditors can either go along with the Station plan or propose amendments or their own plan. Parties interested in acquiring Station assets will have an opportunity during the bankruptcy process to offer deals either on their own or in collaboration with lenders.

Lerner said lenders will likely end up with a significant equity position in Station, which is what happened with the Tropicana Entertainment bankruptcy and what is proposed with the Herbst Gaming bankruptcy.

Lerner said he is sure Las Vegas-based Boyd Gaming Corp. will seek some of the assets during the bankruptcy process, and said he wouldn't be surprised if Penn National Gaming -- which is interested in expanding to Las Vegas -- also takes a look at the assets.

In the meantime, Lerner said he expects the company's customers, employees and suppliers will be unaffected by the bankruptcy filing.

"I can't imagine there's any risk to the employees, customers and vendors," he said.

Station officials said the company's casino operating subsidiaries did not file for bankruptcy and that the company will continue normal operations at all of its properties under the direction of its existing management. In addition to cash generated from its operating subsidiaries and affiliates, the company has in place an agreement with its senior secured lenders that, subject to court approval, permits it to borrow, as needed, up to $150 million of cash from one of its non-operating subsidiaries.

"Station Casinos is a great company and our 18 casinos and resorts continue to generate positive cash flow, but the global recession has severely impacted our company, just as it has every other company in the gaming industry. The restructuring of our debt will provide us with the financial flexibility necessary to meet the challenges of the current economic environment. Equally important, it will provide the resources necessary for us to continue to invest in our properties, take advantage of opportunities as they arise and ultimately enable us to emerge as a stronger company," Fertitta III said in a statement.

"All of our casinos will continue to operate as usual and we will continue to provide our guests with the same great value and entertainment choices they have always enjoyed at our properties," said Kelley. "From our loose slots, to honoring points earned in our Boarding Pass program, to our great promotions and contests ... itfs business as usual at Station Casinos."

Executives said the company's joint ventures would be unaffected by Tuesday's bankruptcy filings. The joint ventures include casino resorts and casinos jointly owned with the Greenspun family, owner of the Las Vegas Sun; as well as deals with tribes to develop Indian casinos in California and Michigan.

Because of reductions in cash flow tied to the recession, the company is having difficulty serving its debt load of $5.74 billion and in February started negotiating with key bondholders regarding a proposed prepackaged bankruptcy filing. The lenders ultimately were unable to agree among themselves on the deal, in which Colony and the Fertittas proposed to pump $244 million in capital into the company.

But Station still hopes the bankruptcy process will result in a deal with the lenders.

And Colony issued this statement about the filing:

"Station Casinos began the next phase of its restructuring today by filing for Chapter 11 in order to reorganize its capital structure in an appropriate forum.@ The decision was not taken lightly and we and our advisors believe this move represents the best alternative to protect the company and allow pursuit of our goal to maximize value to the benefit of all stakeholders.

"The sudden and unprecedented upheaval in the markets over the last 18 months and the recessionfs outsized impact on tourism, property values@and jobs in Las Vegas has had a devastating effect on the gaming industry. Not surprisingly, Station, which is dependent on a growing population and financing for new construction, was especially hard hit.

"The company enters the bankruptcy process with significant liquidity and an internally provided DIP (financing).@ We believe the process will culminate in a new beginning for a solid, well run business.@ Colony will maintain its stewardship of the Company throughout the process and we will continue to look for opportunities in the gaming sector as we manage through these challenging times."

Boyd Gaming, which this spring offered to buy all or part of Station, on Tuesday reiterated its interest in acquiring all or part of the company.

David Schwartz, director of UNLV's Center for Gaming Research, said that as the bankruptcy case unfolds, any party interested in acquiring some of the Station assets must recognize that locals' gaming is fundamentally different than the destination gaming market on the Las Vegas Strip.

"The locals gaming market is very sensitive to customer service and word-of-mouth," he said.

He noted that's something Station has been successful at, as it along with Boyd Gaming and Coast Casinos -- now owned by Boyd -- built the Las Vegas locals market.

In a regulatory filing, Station said affiliates filing for Chapter 11 reorganization were FCP Holding Inc., FCP VoteCo LLC, Fertitta Partners LLC, FCP MezzCo Parent LLC, FCP MezzCo Parent Sub LLC, FCP MezzCo Borrower VII LLC, FCP MezzCo Borrower VI LLC, FCP MezzCo Borrower V LLC, FCP MezzCo Borrower IV LLC, FCP MezzCo Borrower III LLC, FCP MezzCo Borrower II LLC, FCP MezzCo Borrower I LLC, FCP PropCo LLC, Northern NV Acquisitions LLC, Tropicana Station LLC, River Central LLC and Reno Land Holdings LLC.

The cases are being jointly administered under the caption "Northern NV Acquisitions, LLC, et al Debtors."

Station's bankruptcy filing listed assets of $5.725 billion and debt of $6.482 billion. The case promises to be complex, as the company estimated it has as many as 5,000 creditors.

Hit hard by the recession, Station in 2008 saw its revenue decline $148.8 million from 2007 while its interest expense increased $113 million because of debt taken on as part of the merger.

The result: Cash flow from operating activities totaled $39.9 million, down $252.3 million from 2007.

In 2008, the company took $2.92 billion in non-cash impairment charges to write down the value of part of the goodwill and other intangible assets that were recognized in the merger.

"The impairment charge is the result of the ongoing recession, which has resulted in decreased projected cash flow estimates, decreased valuation multiples for gaming assets due to the current market conditions and higher discount rates resulting from turmoil in the credit markets," the company said in a regulatory filing.

(Discount rates are what investors demand to be paid for the risk of investing in assets. As discount rates rise, asset values decline.)

Station also reported weaker results for the first quarter of 2009.

Gross revenue of $307.6 million was down from $378.8 million in the same quarter of 2008.

A measure of profitability, operating income and earnings from joint ventures, fell from $68.5 million in the 2008 first quarter to $29.4 million in the 2009 quarter.

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