TPG buys up Palms loans

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Texas Pacific Group, one of the private equity sponsors of Harrah’s Entertainment, has been accumulating a stake in Palms Casino’s fully drawn USD 380m revolver, two sources close to the situation and a lender told Debtwire. The investment points toward a systematic strategy by Harrah’s to acquire other casinos through their distressed debt, said a buyside source.

TPG and Apollo Management – Harrah’s other sponsor – just completed the acquisition of the Planet Hollywood casino-hotel built around their purchase of a USD 140m chunk of the casino-hotel’s junior interest debt at a deep discount last summer. Palms, which is owned by the Maloof family, is in the middle of negotiations with lenders to cure a covenant breach, creating a potential takeover opportunity for anyone with a blocking stake in the debt.

TPG started buying bank debt issued by Palms parent company Fiesta Palms in the 40s and kept buying all the way to present levels in the 70s, said multiple buyside sources. A USD 42.75m slice of the revolver that was put up for auction and sold last week in the mid-70s but it remains unclear who the buyer was, said a source close to the situation.

Harbinger Capital Partners and Fortress Investment Group both held positions in the debt but recently sold out, said one of the original sources close and a third source close to the situation.

TPG, Harbinger and Fortress declined comment. Harrah’s did not return calls seeking comment.

Palms’ EBITDA plunged downward to USD 12m this year from roughly USD 70m two years ago as worsening economic conditions gutted its tourist and locals. The Palms Place condo-hotel launched in 2008 is a poster child for the recent wave of overambitious casino projects as it had only leased one-third of its condo-hotel units by late 2009, said one industry source.

The borrower tripped covenants last year on its Libor+ 250bps USD 380m revolver due October 2010. Palms subsequently proposed an amendment whereby the loan would mature in June unless the Maloof family succeeds in selling its separate beer distribution business before then and uses proceeds to pay down USD 30m of the loan, said said one of the sources close to the situation. The Maloof family is in the process of selling its distributorship unit in New Mexico for USD 100m.

Assuming completion of the sale and loan buyback before June, the revolver would be extended to March 2011, added that same source. Lenders would also receive additional second lien security at the property’s adjoining Palms Place Hotel and Spa.

Mixed blessing

Even if TPG and Apollo successfully execute a loan-to-own play, turning Palms around is no sure bet given depressed activity and excess room supply in Las Vegas, said multiple investors in distressed casino assets.

Palms changed its marketing approach five months ago by hiring Paul Pusateri from the Las Vegas Sand’s Venetian property. The new strategy focuses more on recruiting and keeping its high-rollers rather than on mass e-mails, said one industry veteran.

Harrah’s might take a more utilitarian approach with Palms and Planet Hollywood, by toning down some of the glitz and boosting appeal to middle market customers. Then the idea would be to feed those customers to other properties in the Harrah’s portfolio.

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