1.26.09
By Pierre Paulden and Michael J. Moore
Jan. 26 (Bloomberg) -- Marian Ilitch, the owner of the National Hockey League’s Detroit Red Wings, is facing calls from lenders to pump more money into her MotorCity Casino or pay an almost sixfold increase in interest as gambling revenue falls.
Credit Suisse AG’s asset management arm, Highland Capital Management LP and other investors told Ilitch to boost capital in the property because it’s at risk of violating terms of a $606 million loan, according to investors with knowledge of the situation. If she doesn’t, lenders may raise the interest on the loan to 18 percent a year, said the investors, who declined to be identified because the talks are private.
MotorCity, owned by Ilitch’s closely held CCM Merger Inc., is a victim of the slump in Detroit, home to General Motors Corp. and Ford Motor Co., and the nationwide decline in gambling profits. Gaming revenue at the 400-room hotel and casino tumbled 7.1 percent in November and 11 percent in December from a year earlier, according to Moody’s Investors Service.
“If they don’t get the amendment, they could be in default,” said Keith Foley, a Moody’s analyst in New York. “The amendment is something that they need.”
Should CCM fail to reach an agreement, it may lose access to a $100 million credit line that it needs to pay a $50 million Economic Development Corp. bond in May, according to Foley. CCM already invested $25 million of equity in September, he said.
Falling Prices
The casino’s term loan due in 2012 was quoted at 42 cents on the dollar, according to a Jan. 20 report from Frankfurt-based Deutsche Bank AG. Its $300 million of 8 percent bonds due in 2013 trade at 55.6 cents on the dollar to yield 25 percent, according to prices compiled by Bloomberg.
“MotorCity Casino’s parent company is in the process of negotiating changes to its credit agreement to bring the financial covenants that were set in 2005 to levels consistent with those already in place for other gaming operators across the United States,” said Jacci Woods, a MotorCity spokeswoman.
Woods declined to comment on details of the talks. Karen Cullen, a spokeswoman for Ilitch Holdings, referred questions to MotorCity.
Creditors are requiring increased rates from borrowers deemed high-yield, high-risk, and in jeopardy of breaking debt agreements after the so-called leveraged loan market lost 29 percent last year. Companies rated below Baa3 by Moody’s and BBB- by Standard & Poor’s are considered high-yield, or junk.
Borrowers paid an average 1.64 percentage points more in interest last year to amend borrowing agreements needed to avoid default, according to Standard & Poor’s LCD data as of September.
Tigers, Little Caesar
Ilitch, who was born in 1933 to Macedonian immigrant parents, is the wife of Michael Ilitch, the 79-year-old owner of Major League Baseball’s Detroit Tigers. The two co-founded closely held pizza chain Little Caesar Enterprises Inc.
CCM used the bonds and loans to buy the 75 percent stake in MotorCity in April 2005 that Ilitch didn’t already own from Las Vegas-based Mandalay Resort Group and other investors. MotorCity opened the hotel in November 2007, adding to the 75,000-square- foot casino.
Debt rose to about 7 times earnings before interest, taxes, depreciation and amortization from 6.1 times in December as gambling revenue fell amid the economic slowdown, according to a Jan. 16 report by Foley. Terms of the loan require the ratio not exceed 6.1, and the limit will tighten to 5.9 times this quarter, he wrote in a December report.
Casino Revenue
Casinos across the U.S. are suffering as consumers cut spending in the recession. Revenue on the Las Vegas Strip, the biggest U.S. gambling center, slid 9.3 percent in the first 11 months of 2008 and was poised for its biggest annual drop since data started being compiled in the mid-1980s, the Nevada Gaming Control Board said. Casino revenue in Atlantic City, New Jersey, tumbled a record 19 percent in December, the New Jersey Casino Control Commission said.
Trump Entertainment Resorts Inc., founded by developer Donald Trump, is negotiating a debt restructuring after the Atlantic City, New Jersey-based casino owner skipped a $53 million interest payment that was due Dec. 1.
Detroit is facing more job losses than the rest of the country after U.S. auto sales tumbled 18 percent last year. Unemployment for the metropolitan area was 9.5 percent in November, up from 7.6 percent a year earlier, data compiled by the Bureau of Labor Statistics show. The national average was 6.7 percent that month.
U.S. automakers are also suffering as the car industry in Europe declines. New car registrations in the European Union fell 18.2 percent in December, according to a Jan. 15 report from the European Automobile Manufacturers Association in Brussels.
Detroit’s Deterioration
“Historically, even with the high unemployment rate, Detroit had done okay on a relative sense,” Foley said. “But November and December numbers, there was a sharp drop-off.”
Deutsche Bank, which arranged the MotorCity loan in 2005, proposed Jan. 13 that CCM increase interest payments to a minimum of 7.75 percent or 5 percentage points more the London interbank offered rate when Libor exceeds 2.75 percent. CCM currently pays 2 percentage points more than Libor, which ended last week at 1.17 percent.
CCM offered to pay a fee of 50 basis points to lenders if they agreed to the change, according to S&P’s LCD, which reported the proposal earlier this month. A basis point is 0.01 percentage point. In exchange, the debt-to-earnings ratio would be increased to 8 times, S&P’s LCD said, without saying where it got the information.
A majority of the investors rejected the offer and asked Ilitch to inject additional cash into the casino, said the investors, who declined to be identified.
Dallas-based Highland, Credit Suisse of Zurich and other lenders said that without more equity, Ilitch must pay annual interest of 18 percent or 15 percentage points more than Libor, whichever is higher, according to the investors. The interest would be split between cash and payment-in-kind, they said.
Credit Suisse spokeswoman Suzanne Fleming, Highland partner Jack Yang and Deutsche Bank spokesman Scott Helfman declined to comment.
To contact the reporters on this story: Pierre Paulden in New York at ppaulden@bloomberg.net; Michael J. Moore in New York at mmoore55@bloomberg.net.
Last Updated: January 26, 2009 05:42 EST
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