Friday Letter Station snake eyes

The filing for Chapter 11 bankruptcy protection this week of Station Casinos could have a damaging impact on the public perception of the private equity real estate industry, argues Zoe Hughes. 

After months of negotiating with creditors, Las Vegas-based Station Casinos finally threw in the towel and filed for Chapter 11 bankruptcy protection.

The decision this week caught few people by surprise after the firm revealed in February it was weighing the possibility as it desperately sought to restructure its debt load.

The post-mortem analysis of this deal will likely colour many people’s perceptions of private equity real estate.

Acquired by a consortium of investors led by Colony Capital, Station’s take-private can in hindsight be viewed as an embodiment of the high leverage and aggressive assumptions of the market boom.

Bought for $5.4 billion with the assumption of $3.4 billion of debt, Station’s $8.8 billion acquisition was fuelled by easily available financing.

Colony invested $1.28 billion from its Colony Investors VII and VIII funds, on top of a $300 million mezzanine investment, for a 75.9 percent stake in the operating company. Other investors, including French private equity firm Eurazeo and Station’s founding family, the Fertitta’s, injected around $2 billion into the deal, according to now-removed information on Eurazeo’s website.

According to the filing for Chapter 11 protection though, the bankruptcy would likely not have happened had the buyout not taken place, or been less geared.

As Station chief executive officer Frank Fertitta stressed on the casino company’s website, the filing related solely to the financial health of the parent company and not the 18 individual casinos and resorts, which continue to have positive cash flows.

“Our casinos are successful businesses that make money, but, due to the overall economy, we have to restructure and reduce our debt at the parent company level,” he said.

In the eyes of the public, by piling up debt to acquire the Las Vegas company, Colony and its investors have undermined what – by Fertitta’s accounts – was a previously sound business that could have survived the global recession.

Of course Station’s progression into bankruptcy has been very painful for Colony Capital and its fund investors as well. According to Los Angeles City Employees' Retirement System fund performance documents obtained by PERE under the state open records law, Colony’s $4 billion Fund VIII returned -85 percent in the past year and -72.9 percent since inception.

In relation to Station’s Chapter 11 filing, Colony said the decision had not been “taken lightly” and that it would maintain its “stewardship of [Station] throughout the [bankruptcy] process” looking for “opportunities in the gaming sector as we manage through these challenging times”. As an experienced buyer of casino operators, Colony certainly has the experience to deal with the job at hand.

Station’s Chapter 11 filing only adds to a growing list of private equity and private equity real estate-backed buyouts that have turned sour largely because the leverage applied to them was, with perfect hindsight, too much for a downturn of this magnitude.

As politicians and regulators turn their attention to the alternatives space generally, private equity real estate will have some explaining to do.