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Arnold M. Knightly


Station casino buyout to rely on securities

28 Jun 2007

By Arnold M. Knightly

LAS VEGAS, Nevada -- The joint venture partnership involved in the $5.4 billion Station Casinos buyout plans to borrow against six locals casino properties to help finance the deal.

Fertitta Colony Partners have an agreement to secure $2.7 billion in debt financing through commercial mortgage-backed securities, according to filings with the federal Securities and Exchange Commission.

The properties -- Palace Station, Boulder Station, Sunset Station, Santa Fe Station, Fiesta Rancho and Fiesta Henderson -- will back the bond sale managed by JPMorgan Chase and Deutsche Bank.

"The reason they're doing this is, it's a cheaper source of capital," said Paul Fiorilla, managing editor of trade publication Commercial Mortgage Alert.

"Traditionally, casino companies have financed themselves through the corporate bond market," he said.

Station Casinos declined to comment on the process.

The properties will be separated into a subsidiary and leased back to Station Casinos for the term of the loan, which is two to five years at an interest rate not higher than 7.5 percent.

Ian Giddy, a finance professor at New York University's Stern School of Business, said many investors find commercial mortgage-backed securities more appealing than lending directly to the companies.

He added that the lease-back provides a contractual income stream to investors that is more reliable than lending funds to the company based on revenues.

"It gives some assurance that the relationship between the income stream and the debt service is going to be more predictable," Giddy said. "The interest rate cap they got is better than you see in many buyouts that don't employ this CMBS financing."

Fertitta Colony Partners will also retain $2.2 billion in outstanding corporate bonds Station Casinos used to finance its growth over the years.

Station Casino's board, without the Fertittas, agreed Feb. 23 to a $90 per share buyout.

No date has been set for a shareholders' vote to approve the deal.

Fertitta Colony Partners is comprised of members of the gaming company's founding family and private equity firm Colony Capital. Station Casino Chief Executive Officer Frank Fertitta, company President Lorenzo Fertitta, and sister Delise Sartini and husband Blake Sartini will invest $870.5 million worth of stock for a 25 percent equity investment in the new company, which will continue to operate as Station Casinos.

Los Angeles-based Colony Capital will contribute $2.6 billion for a 75 percent equity share.

The Fertitta brothers and Colony Capital Chairman and CEO Tom Barrack will comprise the new company's board of directors.

Barrack holds a Nevada gaming license through Colony Capital's $280 million purchase of the Las Vegas Hilton in 2003.

JPMorgan wrote a $960 million mortgage in 2006 for Colony Capital's acquisitions of four casinos: Atlantic City Hilton, two in Tunica, Miss., and one in Chicago, according to the Commercial Mortgage Alert newsletter.

JPMorgan Chase is also managing the $7 billion to $8 billion bond sale for the private equity buyout of Harrah's Entertainment. Apollo Management and Texas Pacific Group plan to use commercial mortgage-backed securities to borrow to help finance the $17.1 billion deal.

Harrah's casino properties generating a third of the company's cash flow will be separated into a subsidiary to finance the bond sale.

"The whole CMBS market being used as a financing tool for casinos is something that is going to continue and get more prevalent as time goes by," Fiorilla said.

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