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Harbinger Capital Partners’ subprime windfall and shareholder activism earned it lots of limelight in recent months but the hedge fund is sticking to its distressed roots in the case of Tropicana Entertainment. The firm holds a significant chunk of Tropicana’s USD 960m 9.625% notes due 2014 and has been involved in the name for months, multiple buyside and sellside sources have told Debtwire.
Harbinger’s investments lately have ranged from the high profile – gaining seats on the NY Times board of directors – to the contrarian – a massive bet against subprime mortgages. Nevertheless, fund manager Philip Falcone is still practicing the basics of vulture investing – he recently swapped bonds for a 30% stake in Solutia – and Tropicana is no exception.
“It’s an opportunistic land play for these guys,” noted one sellside source. The land in question is property in Las Vegas, which happens to be located just next door to the Hooters Casino Hotel that Harbinger has long been rumored to own bonds in.
Repeated calls to Falcone for comment were not returned.
For the moment, the 9.625% bond holders have no recourse to the Las Vegas assets because the notes were issued by Tropicana Entertainment, not Tropicana Las Vegas, which carries a separate USD 440m LandCo loan on its balance sheet. However, the Las Vegas entity was recently served with a notice of default by its loan holders, many of whom are rumored to be owners of the Tropicana Entertainment bonds.
If the Las Vegas asset were included in a bankruptcy filing, bonds at the Entertainment level could try to stake a claim on the property’s value, said buyside and sellside source. The 9.625%s popped 2.5 points to 49.6250 on Tuesday (29 April), the day Tropicana announced the default, according to MarketAxess.
Excluding the impact of Las Vegas, a buyside source and two sellside analysts project a recovery in the 30s for the bondholders based on projected sales proceeds of Tropicana’s other casinos. The 9.625% has ranged between 60 and 45 since January.
An official at Credit Suisse, the agent on the LandCo loan, declined to comment on whether the investors that pushed for the default notice included Harbinger or other holders of the 9.625%s. The LandCo loan did not trade in February or March but abruptly began to be quoted in the low 90s in mid April before gapping up to 94.625 - 95.625 last week, according to Markit.
Harbinger is part of an ad hoc bondholder group advised by Jefferies and Brown Rudnick. The advisers negotiated a forbearance agreement with Tropicana last month but that is set to expire on 15 May if the casino operator fails to execute a signed term sheet for a consensual restructuring by that date, according to SEC filings. The grace period of the LandCo loan expires 21 May.
However, talks might extend beyond the original deadline due to recent turnover in Tropicana’s management, noted a source familiar with the situation. Scott Butera, who led Trump Entertainment through its bankruptcy filing earlier this decade, took over as Tropicana’s CEO on 20 March.
One point of contention is the right valuation for Tropicana’s Atlantic City property, said buyside sources. Bond holders need the casino-hotel to sell for close to USD 800m to justify current trading levels. Tentative bids for the asset were due yesterday, according to one lender.
Tropicana has already divested casinos in Evansville, Indiana and Vicksburg, Mississippi for USD 225m of cash and USD 50m of other considerations, while its non-Las Vegas assets that are not up for sale are worth USD 600m - USD 660m, said buyside and sellside analysts. The Tropicana Las Vegas is valued at roughly USD 625m based on a valuation of USD 18.5m per acre on its 34-acre property, according to the analysts.
Based on those assumptions, Tropicana’s combined enterprise value would be roughly USD 2.3bn. That would leave bondholders and other unsecured claims with USD 565m of value after accounting for a USD 1.3bn loan at the Tropicana Entertainment level and the USD 440m LandCo loan.
Tropicana Entertainment did not return calls for comment.
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