Bankruptcy hearing resumes for Station Casinos

Station Casinos' bankruptcy hearing resumes today and is expected to focus on a request by a group of smaller lenders that the court appoint an examiner to look into actions the company has taken since the recession hit.

The lenders, who account for nearly 5 percent of the company's $5.7 billion debt, want an examiner to look into whether the board had any conflicts of interest when it rejected Boyd Gaming Corp.'s offer to buy all or part of Station Casinos. They also want the examiner to look into any possible conflicts involving the company's "three stack" financing structure that was used to finance the company's buyout.

The lenders question the buyout's financing, which is divided into three stacks of loans, each with different investors but all controlled by Station Casinos' board and administrating bank, Deutsche Bank.

"With each stack now deep within the zone of insolvency there can be no dispute that the fiduciary duties owed by Station Casinos' directors and officers have expanded to include duties owed to the creditors of each stack," the lenders said in an amended Sept. 3 filing.

Station Casinos, however, said in a Friday filing that the small banks merely want to circumvent their credit agreement, which they willingly chose to invest in.

Station Casinos' attorneys called the banks' claims "simply inaccurate" and "plainly false."

The group also questions the board's decision to reject Boyd Gaming's nonbinding offer to buy most of Station's operating assets for $950 million.

The banks accuse Station Casinos of rejecting the offer out of hand and of refusing to allow Boyd Gaming to conduct due diligence.

Station Casinos, in its Friday filing, said a Station Casinos executive met informally with members of Boyd Gaming's management who expressed an interest in acquiring one or two of Station's properties.

Boyd Gaming submitted its offer on Feb. 23, which Station rejected a week later after the board held discussions with its legal and financial advisers and certain creditors, Station's court filing said.

Representatives of a special committee of Station Casinos' board of directors also are expected to present to Judge Gregg Zive their findings from a study that found the company's economic problems were due to the economic recession, not because of the company's $5.7 billion buyout. The buyout was completed in November 2007 before the economy began to crash.

Natixis, Bank of Hawaii, First Tennessee Bank, General Electric Capital Corp. and the Bank of Nova Scotia are among the 10 banks that are asking the court to appoint an examiner.

The banks are all minority lenders in the company's largest financing "stack," termed OpCo, which holds $3.2 billion worth of the company's debt.

OpCo owns and operates a majority of Station Casinos' properties and joint ventures, development projects and holds all of the company's gaming licenses and management contracts, vacant land and intellectual property assets.

A second financing structure, called PropCo, leverages Red Rock Resort, Sunset Station, Palace Station and Boulder Station, against nearly $2.5 billion of the company's debt.

The third stack is a $250 million land loan secured by 61 acres on the southern end of Las Vegas Boulevard at Cactus Avenue, and some of the 106 acres around the Wild Wild West on Tropicana Avenue west of Interstate 15.

The group has said that it is concerned many of the decisions that have been made by the board and Deutsche Bank "have the potential to unfairly ... shift value from one stack to another, and thereby benefit one stack's creditors at the expense of another."

The smaller banks specifically question the company's decision to lease back the PropCo properties for $250 million per year and question whether the agreement shouldn't be reworked or recharacterized as an unsecured claim. The group also questions whether funds from their stack should be used to fund "massive" capital expenses and development while the company is in bankruptcy.

Station Casinos dismisses those concerns and notes in its Friday filing that any "value-shifting transactions outside the ordinary course of business can only occur" with approval of the bankruptcy court.

Station Casinos' "conduct to date has been guided by one straightforward and overriding principle, to continue to operate their enterprise in such a manner as to preserve and protect value to the greatest extent possible, while at the same time negotiating aggressively and expeditiously with all constituents toward a comprehensive ... restructuring," the company said.

Contact reporter Arnold M. Knightly at aknightly@reviewjournal.com or 702-477-3893.