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Less than nine months after Station Casinos completed a management buyout, the casino operator appears to be preparing a debt workout.
The Nevada-based gaming company sent a letter to owners of its senior subordinated bonds last week asking them to identify the current amount of their holdings, a bond holder, a sellside analyst and an industry investment banker told Debtwire. The letter also states that management is “contemplating a transaction,” but did not disclose any further details, he added. Station had asked for submissions by 24 July, said the same bond holder.
The launch of a bond holder identification initiative fueled rampant speculation that sponsor Colony Capital would tender for the bonds or that Station would swap them into secured debt. Both Station and Colony declined to comment.
Station’s benchmark USD 700m, 6.875% senior subordinated notes due 2016 traded at 52.50 yesterday, up from an all-time low of 43-44 on 11 July, according to MarketAxess. The subs were quoted around 90 in early October ahead of the MBO and steadily declined since then.
In contrast to the sub rally, Station’s USD 450m in 6% senior notes due 2012 and 7.75% senior notes due 2016, both traded off to 75 today from the low 80s last week, as talk of an exchange circulated. The casino operator’s post-MBO capital structure also consists of a USD 250m term loan and a USD 2.475bn CMBS loan, that has no recourse to the properties.
CEO Frank Fertitta and President Lorenzo Fertitta grew Station through an aggressive strategy of building and acquiring local casinos in Nevada that rely principally on patronage from area residents rather than tourists. That approach paid off handsomely until last year when the housing slump crushed the company’s core customer base.
“The local [casinos] are not going to do so swell when the foreclosure rates on houses are so high,” said one sellsider analyst.
Gaming revenues at Station rose 6% in FY07 year-over-year to 1.03bn but that compares to a 17.3% jump in FY06. So far this year, 1Q08 revenues dropped 6% relative to the same period in 2007.
Management did diversify in recent years by building the Red Rock Casino and Green Valley Ranch Casino Hotels to capture tourist dollars. However, even that has fizzled in 2008. Room revenues company-wide jumped 35% in both 2006 and 2007, but were flat in 1Q08 relative to last year. Hotel occupancy dropped to 88% in 1Q08 from 94 in the same period last year.
Green Valley’s USD 300m Libor+ 325bps second lien was quoted 61-65 today, down from 77 in mid-April, according to Markit
Weakened performance across the business prompted Moody’s Investors Service to downgrade its rating of Station to B3 from B2 and of its subs to Caa2 from Caa1 citing concerns that the company would need to amend covenants in its credit facility. Moody’s forecasts year-end leverage of 9.2x and interest coverage of 1.3x, well below the respective 8x and 1.75x 4Q08 covenant requirements for the two ratios. Station reported a 1.88x consolidated coverage ratio and 8.15x total leverage in 1Q08.
In terms of liquidity, Station reported USD 84m of cash on hand and USD 350m of revolver availability as of 1Q08 but any amendment talks would threaten the company’s access to its credit facility. In 1Q07, prior to the LBO, the casino operator reported USD 115m of cash, USD 1bn of availability and 5.95x leverage.
Despite its financial woes, Station continues to pursue growth. The company intends to open the USD 675m Alliante Station casino hotel by the end of the year and broke ground earlier this month to build the Durango Station Resort and Casino for a 2011 opening.
Earlier this spring, Station Casinos said it was in the design stages of a USD 10bn casino-hotel project named Viva. Despite the sour markets for capital raising right now, a sellside analyst said that Station could succeed with this project, according to an 28 April article in the Las Vegas Review-Journal.
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