A severe dip in Las Vegas tourism and apparent infighting among the owners of the Las Vegas Strip’s Aladdin megaresort prompted the Aladdin to say for the first time Thursday that it may have to close just 13 months after its opening.
The Aladdin, the Strip’s newest megaresort, has been a prime candidate for bankruptcy for months and this has been widely reported. But the possible closure of such a huge business, which cost $1.2 billion, has 2,567 rooms and employs 2,600 people, was inconceivable just two weeks ago.
But then, so was the possibility terrorists would use commercial jetliners in kamikaze attacks on the World Trade Center and the Pentagon — and trigger a huge downturn in the U.S. tourism and gambling industries.
While still considered unlikely by observers, the possibility of the Aladdin closing was raised in a report filed by the company Thursday afternoon with the Securities and Exchange Commission. The filing came one day after the Aladdin laid off 500 workers, or about one-sixth of its workforce.
“(Aladdin’s) cash on hand, together with cash projected to be generated from operating activities, is not sufficient to permit (Aladdin) to conduct business activities,” the SEC filing said. “(Aladdin) may be required to cease operating unless additional cash is infused into (the Aladdin).”
The Aladdin’s bankers are willing to consider extending more credit to the property, but only if the Aladdin first files for Chapter 11 bankruptcy, the filing said.
Aladdin officials declined to comment beyond the report. In a statement today, Aladdin minority owner London Clubs International said the filing was issued without the consent of the Aladdin’s board, which is controlled by LCI.
LCI’s stock went into free fall on the news, falling 53 percent to 6 pence on the London exchange today.
The Aladdin said it can only file for Chapter 11 bankruptcy with the support of both LCI and the Sommer Trust, the majority shareholder.
LCI spokesman Luke Morton declined to comment on whether LCI would support a bankruptcy filing by the Aladdin; Jack Sommer, principal of the Sommer Trust, could not be reached for comment.
However, LCI’s statement stated that its discussions with the Aladdin’s banks “have now focused on a financing solution which may require Aladdin Gaming to file a petition under Chapter 11 of the United States Bankruptcy Code” — suggesting LCI would be willing to agree to bankruptcy.
Relations between the two best online casino singapore owners appear to have completely broken down. But Larry Klatzkin, gaming analyst with Jeffries & Co., doesn’t believe Sommer or LCI would have anything to gain by blocking a bankruptcy.
“Either one could block it, but why would either party want it to close?” Klatzkin said. “It isn’t in the equity holders’ interest to let it shut down.”
If the Aladdin does go bankrupt, it would likely be the largest bankruptcy in the history of the Nevada gaming industry.
Companies holding multiple properties have gone bankrupt before, “but because construction costs were so high on this property, in terms of total debt, this is the largest gaming bankruptcy we’ve seen,” said Candace Carlyon, a Las Vegas bankruptcy attorney.
This possibility has been anticipated for months by analysts and observers, as the property has consistently been unable to produce enough cash flow to cover the payments on its $700 million-plus debt load.
In August, the Aladdin appeared close to finding a temporary solution to this problem. The equity holders and the banks agreed to a deal that would suspend principal payments on the Aladdin’s bank debt for one year — a move that would have saved the property nearly $18 million in the next year, and probably kept it out of bankruptcy in the near-term.
But in a move that stunned observers, Sommer apparently withdrew support for the new deal over the Labor Day weekend. With the failure of this deal, Sommer and LCI were required to immediately invest $8 million into the Aladdin — a “keep-well” payment designed to keep the Aladdin solvent.
But neither Sommer nor LCI had any money to invest. This put the Aladdin into default on its bank debt.
A second default, this on the Aladdin’s furniture and equipment lease financing, followed when the Aladdin failed to make a $4.3 million payment to General Electric Capital Corp. and General Motors Acceptance Corp. on Sept. 3.
The Aladdin was already an extremely precarious situation. Then came the terrorist strikes on New York and Washington Sept. 11 — attacks that have drastically reduced tourism to Las Vegas, and forced many casino operators to lay off workers.
“It is considered likely that this (the reduction of tourism business in Las Vegas) will significantly reduce revenues and profitability of the Aladdin in the short to medium term at the very least,” LCI’s statement said.
“It’s hit them like everyone else,” Klatzkin said. “Unfortunately, they didn’t have a lot of room to survive that.”
In this deteriorating environment, GE Capital and GMAC moved against the Aladdin. They presented the property with an ultimatum — pay the $4.3 million by Sept. 28, or face repossession of its furniture and equipment, including the resort’s slot machines.
If repossession of equipment is attempted, the Aladdin “likely would seek protection from its creditors under Chapter 11 of the United States Bankruptcy Code,” the Aladdin filing stated.
Under bankruptcy, Aladdin’s $75 million in annual debt payments would be suspended, making it far easier for the property to operate at a profit. And Aladdin’s bankers, led by the Bank of Nova Scotia, also appear willing to give the Aladdin additional cash to continue operating if it files for bankruptcy.
While Bank of Nova Scotia can use this to entice a bankruptcy, it would be difficult for the bankers to force it into bankruptcy, Carlyon said. That’s because only “undersecured” creditors can file a petition for an involuntary bankruptcy — and the bank debt is secured by the property itself.
“It would be fairly unusual for the secured creditors to take that position (that the Aladdin is worth less than the mortgage debt) this early in the case,” Carlyon said.
Three unsecured creditors with debt totaling $10,000 or more — such as trade creditors — could file such a petition, Carlyon said.
But Carlyon said she would be surprised if an involuntary petition even became necessary, given the fact that financing in bankruptcy appears available.
“I can’t believe that anyone would allow this property to close if there was a rational alternative,” Carlyon said. “What we’ve always understood … is that properties are worth more operating than closed. Even though we’re looking at a different world today than one week ago, it’s hard to believe that theory would be discarded in the case of the Aladdin.”
No matter what happens to the Aladdin, the adjoining Desert Passage mall would be unaffected. It is owned by a separate company, TrizecHahn Corp.
“No matter what happens at the Aladdin, we are fully open for business at Desert Passage, and will remain so,” said Andrew Blair, executive vice president and chief operating officer of TrizecHahn Development, the subsidiary that operates Desert Passage. “The hotel-casino is a very valuable property, in an exceptional location, and personally, I think it’s highly unlikely the hotel-casino will close under any scenario.”