Colony’s Vegas-Based Station Casinos Near Default

(Bloomberg) – Station Casinos Inc., whose Las Vegas-area properties include Red Rock Casino and the two-month old Aliante Station, may be on the brink of default, making its private-equity owners a casualty of the largest recorded decline in gambling revenue.

Colony Capital LLC, the Los Angeles private-equity firm that took Station private with the casino company’s founding family in 2007, added more than USD 2 billion of loans and bonds to Station’s books to complete the USD 8.8 billion deal. The extra leverage puts Station at risk of breaking terms of bank debt, said Peggy Holloway, an analyst at Moody’s Investors Service.

“From a liquidity perspective, they are on the brink of bankruptcy,” New York-based Holloway said in an interview. “It depends on their ability to negotiate with lenders and willingness to amend the debt.”

Private equity firms including Apollo Management LP and TPG Inc., owners of Harrah’s Entertainment Inc. in Las Vegas, are struggling with casino buyouts made before the deepest financial crisis since the Great Depression. Harrah’s, the world’s largest casino company, posted its fourth straight quarterly loss in November. Fortress Investment Group LLC and Centerbridge Partners LP last year abandoned a takeover of Penn National Gaming Inc. and agreed to pay the casino operator USD 1.5 billion in cash and an equity investment.

Lori Nelson, a spokeswoman for Station, declined to comment, as did Colony spokesman Owen Blicksilver. Founded in 1991 by Tom Barrack, 61, Colony has invested more than USD 39 billion in real estate-related assets. Its casino properties include the Las Vegas Hilton.

At Risk

Station said in a Nov. 10 regulatory filing that it was at risk of breaching covenants in a credit agreement by the end of 2008. The company hasn’t said whether that occurred. Station has a bond payment due Feb. 1, according to Chris Snow, an analyst at CreditSights Inc. in New York. It has probably breached the covenants, Snow said in an interview.

The payment is for USD 450 million of 6.5 percent notes due in 2014, Snow said. The securities now trade at 2.5 cents on the dollar, down from 70 cents in February 2008, according to Trace, the bond-pricing service of the Financial Industry Regulatory Authority. All told, Station has USD 900 million of bank loans rated by Moody’s, USD 2.3 billion of bonds and a USD 2.475 billion commercial mortgage-backed facility.

Spreads Widen

The cost to protect Station’s bonds from default for five years using credit derivatives rose 1.6 percentage points to a record 81.13 percent upfront and 5 percent a year today, according to CMA Datavision. That means it would cost USD 8.1 million initially and USD 500,000 a year to protect USD 10 million of bonds for five years.

Station stumbled in December, when it failed to persuade bondholders to swap securities for debt that was worth less and came due later. Apollo and TPG successfully used the same strategy the same month to reduce debt at Harrah’s.

Following the aborted effort, Station sought to borrow all USD 257 million remaining of its USD 650 million credit line, a filing showed. Taking the cash from the bank line is “an indication they expected to breach,” Snow said in an interview.

Moody’s rates the company SGL-4, saying it has the worst so-called liquidity rating. The average one-year default rate for companies rated SGL-4 is 19 percent for the past seven years, compared with 2.5 percent for all issuers with the SGL rating during that period, Moody’s data shows.

Casinos across the U.S. are suffering as consumers cut spending. Revenue on the Las Vegas Strip, the biggest U.S. gambling center, may have had the biggest annual drop since data was first compiled in the mid-1980s after sliding 9.3 percent in the first 11 months of 2008, the Nevada Gaming Control Board said.

Station opened Aliante, a USD 662 million casino and hotel in North Las Vegas, in November with an eleven-minute fireworks show, and has scheduled performers including Kenny Loggins and Grand Funk Railroad. Station also owns Red Rock, a USD 1 billion project 10 miles off the Las Vegas Strip that features a 96-foot video wall.

Colony’s involvement in Station dates back to 2007, when it invested as much as USD 2.69 billion of equity and teamed up with Station Chairman Frank Fertitta III, 46, and his brother, President Lorenzo Fertitta, 40, according to Moody’s.

Deutsche Bank, JPMorgan

Lenders to the Station buyout include Deutsche Bank AG and JPMorgan Chase & Co., which arranged USD 900 million in loans. Wachovia Corp., Natixis Bank, BNP Paribas and Bank of Nevada also provided loans, according to the credit agreement. Scott Helfman, a Deutsche Bank spokesman, and Brian Marchiony, a JPMorgan spokesman, also declined to comment.

“Private equity believed these assets could be burdened with considerable amounts of debt, but failed to take into account true cost of capital and other fixed charges that these assets need to maintain the physical plant,” Deutsche Bank analyst Andrew Zarnett wrote in a Jan. 20 report on the gambling industry. “There is no doubt that they also failed to take into account the likelihood of a recession.”

Zarnett recommended investors avoid Station Casino’s debt due to “deteriorating fundamentals, upside down balance sheets, lack of liquidity, high leverage and potential breach of covenants.”