Red Rock Casino, Resort & SpaThe Fertitta family's Station Casinos, now headed by brothers Frank J. Fertitta, III and Lorenzo Fertitta, has long been a Las Vegas juggernaut. Started with a single casino opened by their late father almost 34 years ago, the company grew to include 18 casinos and resorts, among them a number of properties off the Las Vegas Strip, Green Valley Ranch in adjacent Henderson and Red Rock Resort in the upscale suburb of Summerlin.

Yet, these days the family business is struggling to remain intact. Though the company's properties -- five of which are owned in a joint partnership with Greenspun Corp. -- are said to be cash-flow positive, Station is burdened with $5.9 billion in debt, a sum that led to its filing for Chapter 11 last July. Now the company is in the midst of a heated battle in the bankruptcy courts as the brothers try to salvage parts of the company and as unsecured bondholders scramble to recoup some of the $2.3 billion they had put into Station when things looked much more promising.

From Boom to Bankrupt

The Fertittas – who also own the very successful mixed martial arts fighting franchise UFC, or Ultimate Fighting Championship – got into this situation by having the kind of Sin City optimism that was common during the Vegas boom. Formerly rose-colored views are evidenced by a neighborhood's worth of stalled-out, star-crossed or just plain defunct casino projects that dot the Las Vegas Strip and its environs. Considering the current state of Vegas, an argument can be made that Station will not be the last gaming operator there to find itself in this situation.

The family's trail to Chapter 11, now being hashed out in a Reno, Nev., courtroom, began back in 1993. That's when the entrepreneurial Fertittas took their family business public. Fourteen years later, in 2007, with a leveraged buyout of $5.7 billion, the brothers took the company private again – and raked in their share of the $1.5 billion that came with the buyout (according to the Wall Street Journal, the money went to Fertitta family members and company executives).

In 2007, the Las Vegas Review Journal reported that Lorenzo Fertitta told Nevada gaming regulators that the motivation for going private included a desire for the company to pursue acquisitions and development more aggressively and more efficiently than it would have been able to if it remained a public company.

The privatization was funded with $900 million from the Fertittas (for a 24% stake) and another scoop of funds from Colony Capital. Additionally, secured loans dropped in from JPMorgan Chase, Deutsche Bank, and others. And then there was that $2.3 billion in unsecured debt. "When the LBO happened, it was about the potential of Station," says Christopher Snow, an analyst with Credit Sights. The price may have been high ($90 per share; the stock closed at $82.72 on the day the buyout was announced), but he adds, "The idea was that they would grow into the capital structure."

At the time, Vegas was on a rush and high-hopes seemed reasonable. In short order, though, the city was hit hard by the recession, and it soon became apparent that Station Casinos would have a very difficult time servicing its debt. By July, 2009 the company filed for voluntary Chapter 11 bankruptcy protection.

The Brothers Devise a Plan

Late last year, the Fertittas formed a holding company, Fertitta Gaming LLC, and endeavored to configure their debt in a more realistic -- and profitable -- manner.

Working with the group of secured-debt lenders, the Fertittas restructured the terms of financing on five casinos (Palace Station, Boulder Station, Sunset Station, Wild Wild West and Red Rock -- held under a company called PropCo) that, cumulatively, happen to be the most profitable in the Station portfolio. The agreement calls for the Fertittas to invest $86 million into the group of casinos. In exchange, they would own 46% of those properties, Colony would have 4% while Deutsche and JPMorgan Chase would share the remaining 50%. All told, according to a source who is close to the deal, "it creates a $1.8 billion entity that comes out of restructured debt."

The arrangement is pending approval from Reno-based U.S. Bankruptcy Judge Gregg Zive. Zive has already green-lighted the auctioning of 11 remaining properties, along with gaming-entitled land in Nevada and future management contracts with Indian casinos out of state (these are all under a company called OpCo). Fertitta Gaming (with the backing of JPMorgan, Deutsche, and Colony) has been made the so-called "stalking horse bidder," meaning it will create a floor for the sale. In this case, the stalking horse bid is $772 million. By June 30, those with an interest in bidding on the OpCo assets can submit letters of intent. The auction is scheduled to take place on Aug. 6.

Unsecured Lenders Likely to Lose

Both of these plans seem likely to leave the unsecured parties without so much as a mini bottle of shampoo. Judge Zive has acknowledged, "The economics indicate there is great difficulty for [unsecured bond holders] to be in the money unless the auction generates interest." He expressed fears that if the reorganization of Station doesn't work out, jobs will be lost and there could be "economic disaster for many parties."

A financial turnoff for outsiders is the fact that if anybody other than Fertitta Gaming successfully bids for the casinos – and, obviously, offers more money than its stalking horse bid – there will be an extra $75 million in costs. Frank and Lorenzo's mother owns the property on which one of the casinos is situated, and she will charge an outside bidder that amount for the land. One of the attorneys has equated that extra cost with a "poison pill."

Concerned with recovering money for their vulnerable clients, attorneys for the unsecured creditors argue that they have been effectively iced out of the process. In court filings, they described the PropCo plan as a "deal between insiders." They characterized the OpCo auction as "the latest component of an overall scheme to ensure that the Fertittas retain control of the Station enterprise, at as low a valuation as they can get away with."

Unfair as all of this may sound, to those in the credit business it's hardly a surprise. "The deal, as it's currently structured, favors insiders and senior lenders," says Snow. "But that is part and parcel of how these processes work. The incentive is to bring the company out of bankruptcy with as little debt as possible."

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