>> CASINO COMPANIES: Herbst Gaming Faces Hurdles
>>
>> Filings Suggest Company Must Restructure Debt Payments or Face Bankruptcy
>>
>> April 2, 2008 < The off-Strip Terrible's is shown Tuesday. In a filings
>> with
>> regulators, Herbst Gaming, the hotel-casino's owner, said its Southern
>> Nevada operations have been negatively affected by failing economic
>> conditions, a statewide ban on smoking in taverns and restaurants, and
>> competition from American Indian casinos in Southern California.
>>
>> Casino operator and slot machine route manager Herbst Gaming may be
>> forced
>> to file for bankruptcy protection unless the company can reorganize a
>> payment structure for its more than $1.146 billion debt, according to
>> documents filed with the U.S. Securities and Exchange Commission.
>>
>> The Las Vegas-based company said its Southern Nevada operations have been
>> negatively affected by failing economic conditions, a statewide ban on
>> smoking in taverns and restaurants, and competition from American Indian
>> casinos in Southern California.
>>
>> Herbst Gaming operates 16 casinos in Southern and Northern Nevada,
>> including
>> the three Primm resorts along Interstate 15 at the California-Nevada
>> border,
>> 35 miles south of Las Vegas, and the off-Strip Terrible's on East
>> Flamingo
>> Road. The company also owns three casinos in Missouri and Iowa and
>> operates
>> approximately 7,200 slot machines through its Nevada route operation.
>>
>> The company is privately held by brothers Ed, Tim and Troy Herbst, but
>> roughly $800 million of its debt is through publicly traded bonds.
>>
>> In its Form 10-K annual report filed late Monday with the SEC, Herbst
>> Gaming
>> said the poor financial results the company experienced during the second
>> half of 2007 have carried over into the first few months of 2008.
>>
>> Herbst's overall revenues were $849.2 million in 2007, almost 43 percent
>> higher than 2006, because the company spent $543 million to acquire two
>> major casino companies, almost doubling the size of its casino holdings.
>>
>> However, a 20 percent loss in revenues from its slot route business,
>> coupled
>> with a doubling of the company's costs, expenses and interest payments,
>> sent
>> Herbst Gaming to a net loss of $127.2 million last year.
>>
>> In February, Herbst hired Wall Street investment house Goldman Sachs to
>> evaluate strategic alternatives for the company, which could include
>> anything from a debt recapitalization to a sale of some of its
>> businesses.
>>
>> According to an independent audit of the company's finances by Deloitte &
>> Touche, Herbst Gaming has "going concern" qualification, which is a
>> default
>> under its credit agreement with its bond holders. The company plans to
>> discuss the matter soon with its bond holders to try and restructure the
>> debt.
>>
>> "We and our advisers are actively working toward such a transaction that
>> would address the decline in our operating results and our capital
>> structure, including our outstanding indebtedness," the company said in
>> the
>> filing.
>>
>> If Herbst Gaming cannot complete a refinancing or restructuring, the
>> company
>> may be required to seek protection under Chapter 11 of the U.S.
>> Bankruptcy
>> Code.
>>
>> Herbst Gaming general counsel Sean Higgins declined comment Tuesday,
>> saying
>> the 10-K filing would speak for the company. Herbst Gaming is not
>> planning
>> to hold a conference call to discuss its 2007 year-end and fourth-quarter
>> earnings.
>>
>> Gaming Control Board Chairman Dennis Neilander said casinos operated by
>> Herbst Gaming would be placed on a different status than other licensees
>> because of the company's financial warnings. Additional audits of the
>> finances and bankrolls at each location will be conducted.
>>
>> Neilander said the control board became aware of Herbst's financial
>> issues
>> as they mounted over the last six months.
>>
>> "This is not a new scenario for us," Neilander said, saying the Aladdin
>> on
>> the Strip and Fitzgeralds in Reno were the last casinos to operate under
>> bankruptcy protection. "It's tough because they were hit by so many
>> factors
>> at the same time. At this point, technically, this is the process we have
>> to
>> take."
>>
>> An investment source with knowledge of the situation said Herbst Gaming
>> wants to resolve the matter without filing for bankruptcy. The source
>> said
>> banks that control about $320 million of Herbst's debt are pushing for
>> some
>> sort of resolution. The source said the bank debt is currently worth
>> about
>> 70 cents on the dollar while the bond debt is worth about 14 cents on the
>> dollar.
>> Several sources said Herbst's downfall began with last April's $394
>> million
>> purchase of the three Primm casinos from MGM Mirage.
>>
>> "They overpaid, pure and simple," said a gaming source who asked not to
>> be
>> named.
>>
>> In January 2007, Herbst paid $149 million to acquire five Northern Nevada
>> casinos, including the Sands Regency in Reno.
>>
>> During Nevada licensing hearings in March 2007, Herbst executives
>> admitted
>> cash flow at the Primm casinos had fallen from $75 million in 2000 to
>> about
>> $30 million in 2003 because of Indian gaming competition. Executives told
>> regulators they were confident they could win back lost business. A year
>> later, it hasn't happened.
>>
>> Sources confirmed that Primm executive Michael Puggi, who had been
>> operating
>> the resorts for MGM Mirage and was retained by Herbst, was recently let
>> go.
>> In the 10-K, the company said the Primm casinos continue to lose business
>> to
>> the expanding California Indian casinos in Riverside County and San
>> Bernardino County.
>>
>> "The Primm casinos derive a significant amount of their business from the
>> Inland Empire region of Southern California, the economies of which have
>> been negatively impacted due to a number of factors, including the
>> subprime
>> mortgage crisis and higher gasoline costs," Herbst Gaming stated.
>> In its slot machine route operation, Herbst blamed a voter-enacted
>> statewide
>> ban on smoking in places that serve food with sending its tavern and
>> restaurant customers to traditional casinos if they want to smoke and
>> gamble. The ban started in January 2007.
>>
>> Not only have revenues in the route operation fallen, $276.9 million in
>> 2007
>> compared with $347. million in 2006, but cash flow from the division was
>> off
>> more than 56 percent, $32.8 million in 2007 compared with $75.5 million
>> in
>> 2006.
>>
>> Herbst Gaming said it has renegotiated several lease agreements and has
>> decreased its annual rent payments by approximately $20 million.
>>
>> "However, if we are not able to offset decreased patron play, or patron
>> play
>> continues to decrease, there may be a material adverse effect on our
>> business, financial condition and results of operations," the company
>> stated. "The success of our route operations is dependent on our ability
>> to
>> renew our contracts."
>>
>> Filings Suggest Company Must Restructure Debt Payments or Face Bankruptcy
>>
>> April 2, 2008 < The off-Strip Terrible's is shown Tuesday. In a filings
>> with
>> regulators, Herbst Gaming, the hotel-casino's owner, said its Southern
>> Nevada operations have been negatively affected by failing economic
>> conditions, a statewide ban on smoking in taverns and restaurants, and
>> competition from American Indian casinos in Southern California.
>>
>> Casino operator and slot machine route manager Herbst Gaming may be
>> forced
>> to file for bankruptcy protection unless the company can reorganize a
>> payment structure for its more than $1.146 billion debt, according to
>> documents filed with the U.S. Securities and Exchange Commission.
>>
>> The Las Vegas-based company said its Southern Nevada operations have been
>> negatively affected by failing economic conditions, a statewide ban on
>> smoking in taverns and restaurants, and competition from American Indian
>> casinos in Southern California.
>>
>> Herbst Gaming operates 16 casinos in Southern and Northern Nevada,
>> including
>> the three Primm resorts along Interstate 15 at the California-Nevada
>> border,
>> 35 miles south of Las Vegas, and the off-Strip Terrible's on East
>> Flamingo
>> Road. The company also owns three casinos in Missouri and Iowa and
>> operates
>> approximately 7,200 slot machines through its Nevada route operation.
>>
>> The company is privately held by brothers Ed, Tim and Troy Herbst, but
>> roughly $800 million of its debt is through publicly traded bonds.
>>
>> In its Form 10-K annual report filed late Monday with the SEC, Herbst
>> Gaming
>> said the poor financial results the company experienced during the second
>> half of 2007 have carried over into the first few months of 2008.
>>
>> Herbst's overall revenues were $849.2 million in 2007, almost 43 percent
>> higher than 2006, because the company spent $543 million to acquire two
>> major casino companies, almost doubling the size of its casino holdings.
>>
>> However, a 20 percent loss in revenues from its slot route business,
>> coupled
>> with a doubling of the company's costs, expenses and interest payments,
>> sent
>> Herbst Gaming to a net loss of $127.2 million last year.
>>
>> In February, Herbst hired Wall Street investment house Goldman Sachs to
>> evaluate strategic alternatives for the company, which could include
>> anything from a debt recapitalization to a sale of some of its
>> businesses.
>>
>> According to an independent audit of the company's finances by Deloitte &
>> Touche, Herbst Gaming has "going concern" qualification, which is a
>> default
>> under its credit agreement with its bond holders. The company plans to
>> discuss the matter soon with its bond holders to try and restructure the
>> debt.
>>
>> "We and our advisers are actively working toward such a transaction that
>> would address the decline in our operating results and our capital
>> structure, including our outstanding indebtedness," the company said in
>> the
>> filing.
>>
>> If Herbst Gaming cannot complete a refinancing or restructuring, the
>> company
>> may be required to seek protection under Chapter 11 of the U.S.
>> Bankruptcy
>> Code.
>>
>> Herbst Gaming general counsel Sean Higgins declined comment Tuesday,
>> saying
>> the 10-K filing would speak for the company. Herbst Gaming is not
>> planning
>> to hold a conference call to discuss its 2007 year-end and fourth-quarter
>> earnings.
>>
>> Gaming Control Board Chairman Dennis Neilander said casinos operated by
>> Herbst Gaming would be placed on a different status than other licensees
>> because of the company's financial warnings. Additional audits of the
>> finances and bankrolls at each location will be conducted.
>>
>> Neilander said the control board became aware of Herbst's financial
>> issues
>> as they mounted over the last six months.
>>
>> "This is not a new scenario for us," Neilander said, saying the Aladdin
>> on
>> the Strip and Fitzgeralds in Reno were the last casinos to operate under
>> bankruptcy protection. "It's tough because they were hit by so many
>> factors
>> at the same time. At this point, technically, this is the process we have
>> to
>> take."
>>
>> An investment source with knowledge of the situation said Herbst Gaming
>> wants to resolve the matter without filing for bankruptcy. The source
>> said
>> banks that control about $320 million of Herbst's debt are pushing for
>> some
>> sort of resolution. The source said the bank debt is currently worth
>> about
>> 70 cents on the dollar while the bond debt is worth about 14 cents on the
>> dollar.
>> Several sources said Herbst's downfall began with last April's $394
>> million
>> purchase of the three Primm casinos from MGM Mirage.
>>
>> "They overpaid, pure and simple," said a gaming source who asked not to
>> be
>> named.
>>
>> In January 2007, Herbst paid $149 million to acquire five Northern Nevada
>> casinos, including the Sands Regency in Reno.
>>
>> During Nevada licensing hearings in March 2007, Herbst executives
>> admitted
>> cash flow at the Primm casinos had fallen from $75 million in 2000 to
>> about
>> $30 million in 2003 because of Indian gaming competition. Executives told
>> regulators they were confident they could win back lost business. A year
>> later, it hasn't happened.
>>
>> Sources confirmed that Primm executive Michael Puggi, who had been
>> operating
>> the resorts for MGM Mirage and was retained by Herbst, was recently let
>> go.
>> In the 10-K, the company said the Primm casinos continue to lose business
>> to
>> the expanding California Indian casinos in Riverside County and San
>> Bernardino County.
>>
>> "The Primm casinos derive a significant amount of their business from the
>> Inland Empire region of Southern California, the economies of which have
>> been negatively impacted due to a number of factors, including the
>> subprime
>> mortgage crisis and higher gasoline costs," Herbst Gaming stated.
>> In its slot machine route operation, Herbst blamed a voter-enacted
>> statewide
>> ban on smoking in places that serve food with sending its tavern and
>> restaurant customers to traditional casinos if they want to smoke and
>> gamble. The ban started in January 2007.
>>
>> Not only have revenues in the route operation fallen, $276.9 million in
>> 2007
>> compared with $347. million in 2006, but cash flow from the division was
>> off
>> more than 56 percent, $32.8 million in 2007 compared with $75.5 million
>> in
>> 2006.
>>
>> Herbst Gaming said it has renegotiated several lease agreements and has
>> decreased its annual rent payments by approximately $20 million.
>>
>> "However, if we are not able to offset decreased patron play, or patron
>> play
>> continues to decrease, there may be a material adverse effect on our
>> business, financial condition and results of operations," the company
>> stated. "The success of our route operations is dependent on our ability
>> to
>> renew our contracts."
