Santa Fe Gaming is planning to borrow an estimated $250 - 300 million from the high yield markets to refinance certain indebtedness and fund the construction of a $120 million neighborhood casino in Henderson, Nevada.
This report has been prepared by the Research Department of the Las Vegas Culinary Union for the benefit of investors who may not receive the details of Santa Fe Gaming's 10-year history from Jefferies Group, who is underwriting this offering. While the Culinary Union has unique knowledge of Santa Fe Gaming stemming from a longstanding labor dispute, this analysis is based strictly on company facts.
The risks posed by lending new money to Santa Fe Gaming are tremendous. Santa Fe Gaming has failed every test the gaming industry has given the company, and absent new sources of capital or maturity extensions, the company will default on its debt obligations by the end of the year.
Its 10-year track record makes the case against lending additional money
to Santa Fe Gaming. However, if there are potential investors who decide
to assume the risks associated with this company, we urge them to require
an equity component in the funding package, with the goal of unlocking
the absolute control Chairman and CEO Paul Lowden maintains over the company's
Every financial transaction Santa Fe Gaming has consummated in a decade has entrenched Mr. Lowden and his family in the company's management. As outlined below, the capital structure of the company has been bad for investors and employees, and it has robbed the company of its viability, if only because it has given the Lowden Family immunity from its bad decisions.
The Litany of Failures
1. Santa Fe Gaming has failed the expansion test.
Since 1992, Santa Fe Gaming1 under Lowden Family management has pursued five major casino developments, none of which has succeeded. Construction costs for some hotel additions have come in over budget. The Henderson casino is the only project still on the drawing board, and it is saddled with an overbuilt neighborhood-casino market.
2. Santa Fe Gaming has failed the competition test.
All of the casinos Santa Fe Gaming has operated have suffered significantly when competitive pressures have risen. The Henderson gaming market is already highly competitive, and there is nothing to suggest that the company will perform better at that location than it did at the Sahara, Hacienda, Santa Fe, and Pioneer casinos when competition intensified.
3. Santa Fe Gaming has failed the profitability test.
Under Lowden Family management, Santa Fe Gaming has only had two profitable years in the last decade, 1996 and 1989. Fiscal 1996 was profitable only because the company posted a $40 million gain on the sale of its Sahara Hotel assets. Fiscal 1989's profitability occurred before the company borrowed money to build the Santa Fe Hotel and pursue riverboat gaming projects.
4. Santa Fe Gaming has failed the management test.
Mr. Lowden devotes substantial energies to his company's transactions, including negotiations over loan covenants, consent solicitations, and new borrowings, while management responsibilities fall to his son Chris, 32, a University of Nevada, Las Vegas dropout. Since 1990, the company has lost 10 corporate directors and executive officers plus several general managers, calling into question the family's ability to attract and retain qualified management to run the new Henderson casino. With the opening of 20,000 new rooms on the Las Vegas Strip in the coming year, competition for competent managers will be fierce.
5. Santa Fe Gaming has failed its investors.
With an entrenched management and a debt-to-equity ratio of 25:1, public shares of Santa Fe Gaming are worth little, trading in the $1 range, down from $18 per share in 1993. Market capitalization is roughly $6 million, and preferred shareholders' dividends are accruing because the company cannot pay them. On the debt side, all of Santa Fe Gaming's public debt has traded below par for much of the period since 1995, and holders of Pioneer Finance Notes may be asked to take less than face value in cash when those notes mature December 1, 1998.
6. Santa Fe Gaming has failed the labor relations test.
Management has reacted irrationally during a six-year labor dispute with the Culinary, Teamsters and Operating Engineers Unions. The Unions have been jointly recognized as the exclusive representative for more than 600 Santa Fe Hotel employees, obligating the Santa Fe Hotel to negotiate in good faith. The company has recently settled a National Labor Relations Board case against it for adverse changes in employee benefits made illegally without negotiating with the Union. While liability for those unilateral changes has not been calculated, the company was unsuccessful in limiting that liability in the settlement.
Santa Fe Gaming is a quasi-public company, which is controlled by its 53% stockholder Paul Lowden. While Mr. Lowden has employed several equity structures in his company's history, he has always maintained absolute control over his company's voting stock. In order to do that, he has relied heavily on debt financing.
As of June 30, 1998, Santa Fe Gaming has $211.8 million of indebtedness, $65.7 million of which matures in December 1998. Total stockholder equity is $8.6 million, and the company's debt-to-equity ratio is 25:1. Its market capitalization is approximately $6 million.
If the company borrows the additional $100 million needed to fund construction
of the Henderson project, its debt-to-equity ratio will rise to 36:1, which
may be unprecedented in gaming's history. By comparison, when Golden Nugget
Inc. borrowed $623 million to build the Mirage Casino-Hotel in 1989, then
considered a risky debt level, its consolidated debt-to-equity ratio was
In addition to being highly leveraged, Santa Fe Gaming's capital structure is complicated by a series of debt transactions which have interlocked the company's subsidiaries in a web of obligations. All of the company's major debt agreements include a provision for cross default if there is a default in any one loan. Additionally, Santa Fe Gaming has guaranteed the debt of its Pioneer Hotel, Santa Fe Hotel and Sahara Las Vegas subsidiaries. Indenture agreements for those obligations also restrict the use of cash at the subsidiary level, preventing distributions of much needed cash to the parent company.
The company has two subsidiaries with operating casinos: Pioneer Hotel
Inc. and Santa Fe Hotel Inc., which own the Pioneer Hotel & Gambling
Hall in Laughlin, Nevada and the Santa Fe Hotel & Casino in Northwest
Las Vegas respectively. There is $60 million outstanding of Pioneer Finance
Mortgage Notes, secured by Pioneer assets, and they mature December 1,
1998. As of June 30,
Santa Fe Hotel owes approximately $113 million in Mortgage Notes, secured
by the assets of the Santa Fe casino and maturing December 15, 2000. The
Santa Fe has $8.6 million in cash as of June 30, 1998, which is restricted
for use only by the Santa Fe Hotel. $33 million of Santa Fe Hotel 11% Mortgage
Notes are owned by another company subsidiary, Sahara Las Vegas Corp. Santa
Sahara Las Vegas owns a 39 acre parcel in Henderson, on which it plans to build the Henderson casino, and a 27 acre parcel on the Las Vegas Strip, called the Wet `n Wild parcel. The two parcels are collateral for a $57.5 million loan, due December 1999, in the form of mortgage notes held by SunAmerica Life Insurance and CS First Boston. Sahara Las Vegas has $1.1 million of cash as of June 30, 1998, to be used exclusively on debt service. Loan covenants prohibit the funds from being used to develop the Henderson site.
Santa Fe Gaming, the parent company, has $600,000 of unrestricted cash as of June 30, 1998. A $4.8 million debt to Sierra Construction, which cannot be paid by company subsidiaries under current loan covenants, matures in December 1998. Potential investors should be certain that the Pioneer Notes and the Sierra obligation have been satisfied before lending additional funds to the company.
Santa Fe Gaming is 53% owned by Paul Lowden, and it has a market capitalization of approximately $6 million. The company's debt-to-equity ratio of 25:1 would rise to 36:1 if it borrows $100 million more for the Henderson development. All of the company's debt is interlocked by cross-defaults and parent-company guaranties, and the parent had only $600,000 of unrestricted cash available as of June 30, 1998.
The Henderson Project's
When it purchased the property in 1994, Santa Fe Gaming borrowed $15 million in 12% First Mortgage Notes Due 1995 from three institutional investors: Putnam, Paine Webber, and Cerberus Partners. The company then hired Prudential Securities to circulatea private bond offering for $75 million. That fall, the offering was abandoned.
In order to repay its purchase Notes, the company entered into an agreement to sell the property for approximately $15.5 million (plus project expenses) to Players International, pending the completion of Players' due diligence. Players terminated that sale agreement, leaving Santa Fe Gaming without funds to repay the Notes. In March 1995, the company agreed to sell its Hacienda Hotel & Casino to generate cash, and the lenders agreed to extend maturity on the Henderson note until that sale was consummated.
Holders of the company's Pioneer Finance Notes had to consent to the
sale of the Hacienda Hotel, before Santa Fe Gaming could sell the assets.
In exchange for their permission, Santa Fe Gaming agreed that the Henderson
parcel would become an asset of the Pioneer Hotel. With the maturity of
the Pioneer Notes looming, the company re-bought the Henderson asset from
The Henderson property is now partial collateral for a $57.5 million
first mortgage to SunAmerica as collateral agent. Under the terms of this
note, no development can proceed on the Henderson property until Sahara
Las Vegas repays SunAmerica $20 million, and the first mortgage is released
from the Henderson parcel. Based upon these terms, it would appear that
SunAmerica, a traditional
The proposed Henderson casino is estimated to cost approximately $100 million excluding land costs. Santa Fe Gaming had $600,000 in cash that is not restricted by debt covenants as of June 30, 1998; the company's remaining cash cannot be used to develop this casino. The company will need to borrow 100% of the construction costs, plus $20 million to release the current mortgage on the land, for a total of approximately $120 million.
The Company has tried but failed to finance the Henderson casino for four years, and even tried unsuccessfully to sell the property once during that time.
Santa Fe Gaming would have to borrow 100% of the Henderson project's cost, and the current lender on the parcel has required the company to pay that loan off before development can proceed.
As the gaming industry grows more competitive and sophisticated, the ability of family-operated casinos to thrive has declined. In the current environment, a corporate management responsive to the business and its investors is a crucial element of success.
Santa Fe Gaming lacks such a management.
Santa Fe Gaming has lost 10 corporate directors and executives since 1990 and several general managers in recent years. Of the 10 lost, three were non-family directors. Since 1990, five people have held the position of Controller or Chief Financial Officer: Dennis Nelson, George Miller, Ronald Radcliffe, Stephen Szapor, and Thomas Land.
Three of the company's current seven directors are members of the Lowden Family. None have casino management experience outside of the family. Mr. Lowden's nominees to the Board of Directors are assured election by virtue of his ownership of 53% of the company's voting shares.
Mr. Lowden manages the company's liquidity crises. He has engaged the
company in no less than nine debt transactions and three consent solicitations
since 1993. He has delegated management responsibilities to his 32-year-old
son, Chris Lowden. Chris, Executive Vice President of the company, is general
manager of the Santa Fe Hotel and, when general managers leave, of the
The operating performance of this company under Mr. Lowden's son, outlined in the following pages, raises the question of Chris' management qualifications. He attended, but did not graduate from, University of Nevada Las Vegas. Perhaps Chris' most revealing quote was recorded in an October 29, 1996 article in the Las Vegas Review-Journal entitled, "The Need for Speed:"
"A friend of mine says he's got to win the lottery to get into [racing] full time. He tells me I won the lottery when I was born."
If it is to succeed, the proposed Henderson casino will need management
that is capable of transforming the way Santa Fe Gaming does business.
The company will be faced with hiring a new management staff at a time
when 4 mega-resorts with 20,000 new rooms will have just opened on the
Las Vegas Strip, and competent managers and casino workers will be in high
Santa Fe Gaming is a family-dominated operation in an industry that has been taken-over by corporate America.
The Wall Street Journal noted on August 24, 1998: "Small-time casinos run by families ... are increasingly being squeezed out, as gambling has grown into a $20 billion-a-year business financed by Wall Street."
A project that is 100% leveraged in a saturated neighborhood casino market, like the proposed Henderson casino, is a risky proposition.
Since 1994, seven full-scale hotel casinos have opened in neighborhood casino markets throughout greater Las Vegas, more than doubling the number. The Fiesta Hotel-Casino and Texas Station Hotel & Gambling Hall opened within three miles of the Santa Fe Hotel in 1995, and faced with that competition, the Santa Fe's cash flow dropped by half. In fiscal 1996, Santa Fe Hotel generated $10.7 million in EBITDA, or cash flow, versus $22.3 million in 1994, when Santa Fe Hotel was a virtual monopoly.
Santa Fe Gaming had similar problems at its other casinos:
bond indentures as the minimum threshold for borrowing additional debt. Santa Fe Hotel will face further competition when Resort at Summerlin, a 600-room casino located in the heart of the Santa Fe's market, opens early next year.
In the Henderson market, recent results from the Reserve Hotel &
Casino, located two miles from the Santa Fe site, are alarming. Since its
February opening, the Reserve has recorded an operating loss of $7.3 million,
excluding preopening costs. The June quarter represented $4.8 million of
that operating loss. Ameristar Casinos, owner of the Reserve, attributed
the "higher than anticipated" losses in part to "…lower than expected revenues
in the intensely competitive `locals' market that The Reserve operates
Santa Fe Gaming's Henderson site will also confront a strong challenge from Sunset Station Hotel & Casino, located directly across the street and operated by Station Casinos, the dominant local casino operator.
Santa Fe Gaming recognized the need for a competitive edge in Henderson
when it entered into an agreement with the adjacent Galleria Mall. The
agreement would have linked the casino to the regional mall as an anchor
tenant, using Santa Fe's proposed ice-skating rink as the connection. This
plan to physically connect the casino and the Mall generated significant
Henderson's local casino market is highly competitive and Santa Fe will have a strong competitor in Sunset Station across the street.
Public debtholders have ridden a rollercoaster through the company's
liquidity crises. Investors were forced to extend maturity on the 1994
Henderson purchase note, as discussed earlier. Santa Fe Hotel Finance Notes
have traded below par for extended periods since the failure of riverboat
plans in Parkville, Missouri and Mississippi, and Pioneer Finance Notes
have also traded below par
Santa Fe Gaming has put the Pioneer noteholders in the least favorable position, by stripping the Pioneer subsidiary of the Henderson parcel and its development prospects. These noteholders are left with a declining asset and a looming December 1, 1998 maturity of $60 million. The 10-year term of the Pioneer Notes represents a long time when measured against the dramatic change in the Pioneer's operating condition. Given its operating condition and the decline of the Laughlin market, which is not expected to turnaround in the foreseeable future, the company is likely to have a difficult time refinancing the Pioneer notes. Arguably, Santa Fe Gaming's other assets are fully collateralized. Cross-defaults in all of Santa Fe Gaming's debt leaves it vulnerable to a potential default at the Pioneer.
Equity investors have fared no better. From the time of his initial public offering of Hacienda Resorts, Mr. Lowden has owned more than a majority of voting shares of the company. When Mr. Lowden created Sahara Casino Partners, L.P., a gaming master limited partnership, 62% of the partnership was owned by Sahara Resorts (successor to Hacienda Resorts). Investors bought into those partnership interests at $9.00 per unit in 1989. In 1993, before Sahara Casino Partners and Sahara Resorts merged, creating Sahara Gaming (renamed Santa Fe Gaming), the partnership units were trading at a low of $2¼ per share.
Limited partners had been promised minimum quarterly distributions of 28 cents per unit, but did not receive them from December 1990 through September 1992, except for two distributions of 5 cents each. In the merger, partners were issued Sahara Gaming preferred shares with a $2.14 liquidation value in addition to common shares. Dividends on those shares have been paid in additional preferred shares, and since 1997 they have accrued, because the company's loan agreements prohibit payment of dividends to stockholders. The capital account for preferred shareholders stands at $21.6 million. Owners of preferred shares will be entitled to elect two new directors to the Board at the next annual meeting.6
Since the merger was consummated on September 30, 1993, Santa Fe Gaming's stock has declined from $18 per share (after giving effect to stock splits) to $¾ per share as of September 9, 1998.
Santa Fe Gaming's addiction to debt has served to preserve Mr. Lowden's voting control of the stock, at the expense of accountability to Santa Fe Gaming's investors. Consequently, we believe that if investors assume the tremendous risks associated with lending this company additional funds now, certain unusual pre-conditions regarding the company's voting stock are warranted. We recommend that Mr. Lowden be required to divest himself of a substantial portion of his voting stock coincident with the proposed debt offering and that he limit future holdings to 20% of voting shares, including shares held by the Lowden Family. We make this recommendation because the company has stringent anti-takeover provisions, which also serve to entrench the Lowden Family management, requiring 75% of stockholders to approve certain business combination transactions. The goal of our recommendation is to institute structural accountability for all investors that we believe can only come through market control of the company.
Whether potential lenders want shares as additional compensation or
not, and they are presently not worth much, we urge investors to assure
that this or a similar precondition is attained before committing to lend
money to Santa Fe Gaming. Change in control can be achieved in any number
of ways, but if it is not possible, in our opinion, Santa Fe Gaming will
Santa Fe Gaming's capital structure is designed to maintain Mr. Lowden's voting control of his company's stock. Public debt holders have seen their investments trade below par, and other lenders have renegotiated their loans to ease company obligations.
Public stockholders have watched their stock decline from $18 to $0.75 since October 1993. Should potential investors decide to assume the tremendous risks associated with lending to this company, we recommend that Mr. Lowden be required to divest himself of a substantial portion of his stock, and that the Lowden Family be limited to 20% of the company's voting equity.
In our opinion, structural accountability to investors can only come through market control of the company's equity.
Will Henderson Follow in
the Footsteps of Santa Fe Gaming's Other Investments?
Since 1992, the Lowden Family management has pursued at least five extra-Nevada gaming opportunities, and not one succeeded. The company signed a tentative agreement in 1992 to manage a casino for the Upper Skagit Indian Tribe in Washington, but never consummated the deal. In 1993, it pursued the last of 10 gaming licenses in Illinois, losing out to a joint venture between Hyatt and Gold Strike. In 1995, the company announced its intention to pursue a casino venture in New Bedford, Massachusetts to no avail.
In 1993, the company leveraged the Santa Fe Hotel assets to fund casino investments in Parkville, Missouri and Treasure Bay Gaming in Mississippi through the offering of Santa Fe Hotel First Mortgage Notes. Community opposition substantially delayed the Parkville project, because the company was forced to conduct four local elections to approve gaming in a deeply divided community. The Culinary Union actively lobbied the community against the casino project during those elections. Meanwhile, the company had bought and leased riverboat assets and had to pay interest on project debt. Squeezed by deadlines in the Santa Fe Hotel notes, the company liquidated its Parkville assets and charged off $14.9 million in 1995.
The 1993 Santa Fe Hotel offering also financed a $10 million equity investment in a Mississippi casino company called Treasure Bay Gaming, which opened two riverboats in April and May of 1994. Santa Fe Hotel additionally guaranteed $4.5 million of Treasure Bay debt, and Treasure Bay hired Santa Fe Hotel to manage the riverboats. In December 1994, Treasure Bay terminated Santa Fe's management agreement, only to file for bankruptcy protection in January 1995. The actions of Treasure Bay and Santa Fe Hotel are the subject of ongoing litigation between the parties. Santa Fe Hotel wrote-off $15.4 million by 1996 to reduce the carrying value of its investment in Treasure Bay.
In addition to these failed developments, expansions and renovations
of company casinos resulted in cost-overruns. In 1992, the general contractor
for additions to the Sahara and Hacienda and for construction of the Santa
Fe made claims totaling $11.8 million for cost overruns at all three projects.
In 1993, Santa Fe Gaming agreed to pay Sierra Construction $10 million,
$6.6 million in the form of a promissory note. That note, with $4.8 million
still outstanding, matures December 1998, coincident with the maturity
of the Pioneer Notes. The company does not yet have available funds to
meet these pending obligations.
The Lowden Family has failed in its pursuit of at least five new gaming
developments since 1992. Its 1988 purchase of the Pioneer Hotel & Gambling
Hall for $120 million at the height of the Laughlin boom has proved to
be a bad investment decision. The Las Vegas Culinary Union has lobbied
actively against the company's expansion plans because they undermine the
stability of the Santa
Since 1993, the Santa Fe Hotel has waged a brutal anti-Union campaign against its workers, who voted for Union representation in a National Labor Relations Board election that year. The Santa Fe ignored the results of that election until a year ago, when an order to bargain with the Unions was upheld in the U.S. Court of Appeals. Bargaining sessions covering approximately 600 workers have not been productive.
On September 1, 1998, the Santa Fe Hotel settled Government charges
against it for illegally changing the terms and conditions of employment
without negotiating with the Unions, covering in particular detrimental
changes in the health insurance plan. The company has agreed to pay employees
back one hundred percent of their losses from the changes, and the case
now enters the
The Culinary Union represents 45,000 casino workers in Las Vegas and has collective bargaining agreements with all but two of the major hotel-casinos on the Las Vegas Strip and Downtown.8 The Culinary Union and the Las Vegas gaming industry have forged a labor-management partnership which is characterized by labor peace and prosperity. However, casinos that choose to buck this pattern of harmonious labor relations have been the object of protracted, costly disputes.
Most recently, the Culinary Union successfully ended a six-year strike against the Frontier Hotel & Gambling Hall, when the hotel's embattled owner sold the casino to an operator who settled the dispute equitably. The strike devastated the Frontier's business and became a symbol of the rebirth of America's labor movement. The Culinary Union spent more than $20 million on that strike.
The Santa Fe's failure to resolve this labor dispute equitably is irrational, and the conflict has had far-reaching implications for this company. The Culinary Union currently is engaging direct-mail and telemarketing firms to urge Santa Fe customers to patronize other casinos. Moreover, the organization has actively lobbied against the company's expansion projects, including most notably those in Parkville and Henderson, because it believes the company should not expand using Santa Fe Hotel resources until it has settled a contract with its workers.
Santa Fe Hotel has been engaged in a protracted labor dispute with the Culinary Union stemming from a representation election the Union won in 1993. On September 1, 1998, Santa Fe Hotel settled Government charges by agreeing to pay employees for changes in their working conditions implemented without negotiating with the Union. It was unsuccessful in limiting liability for those changes, which date back to 1995. Total damages have not yet been calculated. The Culinary Union's last major battle was a 6-year strike at the Frontier Hotel & Casino that cost the Union $20 million. It was settled successfully this February.
Santa Fe Gaming is not a struggling company on its way to success. It is a company locked in the old ways of operating in the casino industry--family-dominated management, an unending reliance on debt financing, and labor troubles which are out of place in the New Las Vegas.
Mr. Lowden is fighting to keep his company alive in an industry which now requires strong management teams, access to cheap capital, and a proven ability to execute a corporate vision.
Instead, Santa Fe Gaming offers a track record under Lowden Family management
Lending additional money to Santa Fe Gaming would result in an unprecedented debt-to-equity ratio and would serve to further entrench an outdated management. For those investors considering this offering, we urge you to take steps to unlock Mr. Lowden's control of the company's stock before you invest.
Your long-term investment deserves long-term accountability. Based on
Santa Fe Gaming's history of failures, we believe that accountability can
only come through market control of the company's stock.
||Las Vegas Culinary Union Expresses Opinion on Pioneer Finance Corp. and Santa Fe Gaming Corp./ Oct 1998|
|Union Demonstrators Arrested at Santa Fe Hotel Casino / Sept 1998|
|1997 Gaming Industry CEO Compensation Rankings - Top 59 / HVS / Oct 1997|