Tag Archives: bonds

Terrible News Again for Herbst and the Casino Industry

The news is terrible again for Terrible Herbst.

Standard and Poor’s Ratings Services has lowered its rating on Herbst Gaming’s 8.125 percent senior subordinated notes to ‘D’ from ‘C’, following Herbst’s failure to make an interest payment on June 1, 2008.

The bad news for casinos is not limited to Herbst properties.  Bloomberg News reports that “Casino bonds are generating the worst returns for investors as companies from Apollo Management LP’s Harrah’s Entertainment Inc. to Herbst Gaming Inc. risk bankruptcy under the weight of their debt.”

Bloomberg also reports that “Herbst Gaming, operator of 8,400 slot machines in Nevada, stopped paying interest last month, Tropicana Entertainment LLC and Greektown Casino LLC filed for bankruptcy in May and bond prices show Harrah’s and Station Casinos, which piled on more than $25 billion of combined debt in the past year to go private, are also at risk of default.”

The culprit is a deadly trifecta of sharply falling revenues and property values combined with an enormous debt overload.

According to the Nevada Gaming Control Board, casino gambling revenue on the Las Vegas Strip fell 4.8 percent to $517.5 million in March, the third consecutive monthly drop.  Similar losses were experienced in Atlantic City, the second-largest U.S. gambling center, where casino revenue fell 6.7 percent this year through April after a 5.7 percent drop in 2007.

These falling revenues come just when the casinos are committed to paying back tremendous amounts of money that was borrowed when it seemed that the good times would never end.

As Bloomberg reports, the casinos “took on a record debt load before the economy’s latest slowdown. Leon Black’s Apollo, of New York, and Fort Worth, Texas-based TPG Inc. acquired Harrah’s in a leveraged buyout in January for $27 billion.  Station Casinos, owner of 12 Las Vegas-area properties, was taken over for $8.5 billion in November by its management and buyout firm Colony Capital LLC. ‘This would probably be the most leveraged’ the gaming industry has ever been, said Michael Paladino, an analyst at Fitch Ratings in New York. ‘There’s going to be an increase in defaults’.”

“Investors from William Yung, who led Columbia Sussex Corp.’s purchase of Tropicana, to Capital Research & Management Co., the biggest Harrah’s bondholder, are being stung by losses. Debt issued by a group of 10 of the biggest high-yield gaming companies from Las Vegas to Atlantic City and Connecticut will rise to a peak of 6.6 times cash flow this year from 6.5 times in 2007, Deutsche Bank predicts. The total debt for the group will increase to $47 billion from $45 billion.”

When it came to taking on debt, the casinos gambled big.

And this time, the analysts say, the odds are against the house.

 

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More Terrible News for Terrible Herbst — Bonds Ratings Lowered and Still No Deal with Creditors

We wrote a post last month about the likelihood that Herbst Gaming will have to file for Chapter 11 bankruptcy protection from its creditors if it is unable to alter its payment structure for $1.14 billion in debt. 

The company is privately held by brothers Ed, Tim and Troy Herbst, but roughly $371 million of its debt is through publicly traded bonds, which have been negatively affected by the fall-out from the subprime mortgage crisis.

Now there is more terrible news for Terrible Herbst.

On Wednesday, Moody’s Investment Service lowered its bond credit ratings for Herbst Gaming.  The bonds were cut from B3 to Caa2. 

Standard & Poor’s also cut Herbst’s credit rating, from B to CCC. 

In addition, Standard & Poor’s announced that it had placed Herbst Gaming on a “developing watch,” indicating an ongoing reevaluation of the credit quality of Herbst’s debt obligations and the likelihood that its credit rating will be downgraded further.

Bonds rated A (“investment grade”) are judged to be of the highest quality, with minimal credit risk; bonds rated B (“junk bonds”) are considered speculative and are subject to high credit risk; and bonds rated C (also “junk bonds”) are judged to be of poor standing and subject to very high credit risk.

Moody’s said the downgrade took into consideration that Herbst Gaming may not meet its financial obligations in 2008.

“It remains unclear at this time what course of action the lenders may pursue with respect to the event of default,” Moody’s said. “The downgrade acknowledges that the continued volatility in the capital markets along with the high cost of borrowing makes it less likely that a strategic alternative will emerge that does not involve some level of impairment.”

The rating actions came after Herbst Gaming said it had engaged Goldman Sachs for evaluation of strategic and financial alternatives. These alternatives may include a re-capitalisation, refinancing, restructuring or re-organisation of the company’s obligations or a sale of some or all of its businesses.

So far, Herbst Gaming has been unable to negotiate a forbearance agreement with its lenders.

UPDATE:

For the lastest news on Standard and Poor’s Ratings Services lowering its rating on Herbst Gaming’s notes ‘D’ from ‘C’, following the Herbst’s failure to make an interest payment on June 1, 2008, and on the debt crisis across the casino industry, click here

 

Terrible News for Terrible Herbst — Herbst Gaming May Be Subprime Losers

We’re racing fans, particularly of the Baja 1000, and we admire the Herbst family, owners of Terrible Herbst Motorsports and Herbst Gaming, for the success of their race cars and their other businesses, all of which have grown from a single Chicago gas station.

So we’re sad to report that as a result of the subprime crisis and its effect on the credit and bond markets, Herbst Gaming may file for protection from creditors under Chapter 11 of the US Bankruptcy Code if it is unable to alter its payment structure for $1.14 billion in debt.

Herbst Gaming, which operates 16 casinos and 7,200 slot machines in Nevada, as well as hotel and gaming properties in Louisiana and Missouri, is privately held by the Herbst brothers, but roughly three-quarters of its debt is provided by publicly traded bonds. 

According to recent filings with the SEC, Herbst Gaming has said that its operations are being negatively affected by the subprime mortgage crisis, a statewide ban on smoking in taverns and restaurants, higher gasoline prices, and loss of gaming customers to Indian casinos. 

Herbst Gaming’s revenues were $849.2 million in 2007, almost 43 percent higher than 2006, after spending $543 million to acquire two major casino companies and nearly doubling the size of its casino holdings.   A 20% loss in revenue from its slot route business coupled with the increased debt load from the acquisitions resulted in a net loss of $127.2 million last year.

Herbst Gaming expects to enter into discussions with its credit agreement lenders to negotiate a forbearance agreement.

“If either the credit agreement indebtedness or the subordinated indebtedness were to be accelerated upon a default, we would be required to refinance or restructure the payments on that debt,” the company stated. “If we were unable to do so, we may be required to seek protection under Chapter 11 of the U. S. Bankruptcy Code.”

We’re still rooting for the Terrible Herbst Team.

UPDATE:

To read the latest news on Herbst Gaming, see our post More Terrible News for Terrible Herbst — Bonds Ratings Lowered and Still No Deal with Creditors.

Billions Poised to be Invested in Distressed Real Estate — But Small Buyers, Beware!

The New York Times reports today that major investors, fueled by domestic and foreign investment groups, wealthy individuals, endowments and pension funds, are prepared to spend billions of dollars buying distressed debt and real estate. 

These investors – often called “vultures” although the Times calls them “market opportunists” – believe that “some people have thrown the good out with the bad, and that the prices of some investments have simply fallen too far.”

For example, the Times reports that one Wall Street specialist in so-called distressed debt “recently spent at least $450 million for assets of Thornburg Mortgage, the battered mortgage servicing company. Others are buying beaten-down corporate bonds and looking at car and credit card loans.” 

“They are buying up mortgages of hard-pressed homeowners, the bank loans of cash-short businesses, and companies that seem to be hurtling toward bankruptcy,” said the Times, “And they are trying to buy them all on the cheap.”

A former executive of the Countrywide Financial Corporation, one of the mortgage giants that fostered subprime lending, recently helped start a company to buy mortgages.

In addition, the Blackstone Group “just raised $10.9 billion from investors to scoop up real estate.”

GlobeSt reports that “According to a company statement, this fund was the largest real estate opportunity fund ever raised.”

Blackstone senior managing director and New York City-based co-head of Blackstone’s real estate group, Jonathan Gray, stated that  “we believe there should be attractive investment opportunities for this capital given the market dislocation that exists today.”

We agree that the current distressed real estate market offers tremendous opportunities. 

The time is right for active, intelligent investors to take advantage of the multi-billion dollar distressed real estate market.  The real estate market is brimming with profit opportunities for those with leverage and expertise

But this is not an easy market for individual, smaller investors to penetrate.

The truth is that most smaller investors do not have the leverage and expertise to succeed in this volatile and extremely competetive market.

In fact, the effort that the smaller, part-time investor in foreclosures and distressed real estate would need to spend identifying properties, haggling with lenders and distressed owners, attending auctions and establishing financing is equivalent to a full-time job — and even then, success is far from likely.

Most smaller investors in this market will get caught up in the buying frenzy, spending too much time and money on so-called coaching and how-to courses from self-proclaimed foreclosure gurus, and then spending too much on property that will continue to fall in value and fail to provide an adequate income stream.

Great real estate deals do exist across the country. But to be successful, investors will need a high level of sophistication in identifying properties, acquiring them and developing the right exit strategy for each asset.

Smaller buyers, beware!

UPDATE:

For the lastest on the real estate vulture fund being formed by disgraced ex-Governor of New York Eliot Spitzer, click here.