Tuesday, July 28, 2009

The Biggest Shoe Yet Drops...

In the biggest shoe yet to drop in the financial disaster that is the Casino Gaming sector, Station Casinos finally filed Chapter 11 Bankruptcy today. It has long been spectulated that it was going to happen and almost did back in March. They have been negotiating with debtors for several months but were not able to come to a resolution to refinance the $5.4B in debt they took on in the 2007 leveraged buy-out that took the company private. The filing doesn't change much for the day to day operations of the company but a few bondholders will certainly be taking it in the shorts, as they should.

This BK filing is the price that Station's management pays for their hubris. Like MGM and Las Vegas Sands, they took on a mountain of debt beyond their ability to pay for it in a poor environment. The big difference between them and MGM/LVS is those companies built with their debt whereas Station just decided they were better than Wall St. and wanted out of the public company game. I am hardly an Econ PhD but only the very best of economic forecasts could have predicted making good on that amount of debt with nothing more than current cash-flow to pay for it. The Fertitta's got so used to the cash register ringing from the endless amount of Las Vegs home-equity that they couldn't envision anything but. Well that register stopped ringing and here now lies the remains of the Fertitta's grand plan. You know the guys over at Harrah's who made the very same bet but only for 3 times the amount of money are sweating coming to work each day. It's only a matter of time before that LBO disaster visits the LV Federal Courthouse with its tail between its legs.

I have predicted these BKs for quite a while and I believe that despite short-term pain, Las Vegas will be better off because of it in the long run. This is capitalism's nature flushing mechanism as those who made bad bets lose their money with no taxpayer bailout required. The new company that emerges is leaner and less burdened with debt allowing it to compete more aggressively for business. Once again, the winner will be the customer who Station will be fighting for. Remember that the very best thing that ever happened to both the Stratosphere and Aladdin/Planet Hollywod was BK as both of the places are now thriving even during this economic downturn.

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