Tag Archives: Colony Capital

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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Michael Jackson’s “Neverland” Rescued by Colony Capital

Foreclosure was front page news again today, but not the kind based on subprime loans to people who can’t afford them.

In this case, the foreclosure (almost) happened to ’80s pop star and (alleged) child rapist Michael Jackson.  The property is Jackson’s famous 2,500 acre Neverland Ranch, just outside of Santa Barbara, California.

According to press reports, Jackson owes $24.5 million on Neverland to Financial Title Company, and can’t pay.  The foreclosure auction for the ranch was scheduled for this week. 

Jackson was bailed out today by an investment company that purchased the loan.

We think that the company that bailed out Jackson by purchasing the loan — Colony Capital LLC — made an excellent deal.

The folks who run Colony Capital are exceptionally smart investors, and the Neverland deal fits perfectly with Colony Capital’s philosophy of “cautious contrarianism.” 

As they explain on their website, Colony Capital “employs the entrepreneurial investment strategy which has been successfully executed over the past sixteen years. This strategy is designed to consistently achieve attractive risk-adjusted returns by minimizing competition with other capital sources, while maximizing value through intensive post-acquisition management.”

“Three themes define this strategic approach:

  • Cautious Contrarianism during downturns or secular changes, investing in out-of-favor sectors or markets to exploit capital or product misalignments
  • Exploitation of Inefficiencies capitalizing on information advantages to identify micro-market imbalances and secure investments on favorable terms 
  • Value-added Management to Optimal Exits creating capital appreciation opportunities through repositioning, restructuring, development, and intensive management.”

Both Jackson and Neverland will no doubt benefit from Colony Capital’s “repositioning, restructuring, development, and intensive management” efforts.

Michael Jackson himself is certainly improperly managed and “out of favor.” 

And no doubt misaligned as well.

For those of you who haven’t been to the Neverland Ranch area, take it from us that it is amazingly beautiful, and is certainly worth far more than Jackson owes, especially with proper management.

We also like this remark from Colony Capital’s Founder, Chairman, and CEO Thomas J. Barrack, Jr.  

In an interview with the French magazine Paris Match, Barrack explained the financial crisis that has followed the bursting of the U.S. housing bubble as follows: “Confidence has disappeared because no one knows any longer who owes what to whom, or what it’s worth. It’s as if toxic waste had been sold in cans with ‘gold’ printed on the lid.”

We wish we’d said that.