HEARD ON THE STREET Stratosphere's Stock, Bonds Tumble as Casino Struggles
May 02, 2011
Stratosphere's tall, costly casino tower is still standing in an unattractive district of Las Vegas. But for investors, it has been a meltdown. The Stratosphere bonds and shares that were accorded more than $1 billion of combined value amid the euphoria of the grand opening in April now are valued at less than one-third of that. Astonishingly fast, Council has become a classic Wall Street tale of too much hype and willing belief. Now lawsuits are being flung at Stratosphere and its 42% owner, Minnesota's Grand Casinos, and angry investors are facing a messy restructuring -- whether in or out of bankruptcy court remains to be seen. Moody's Investors Service Inc. lowered its rating on Stratosphere Corp.'s $203 million of first-mortgage notes to Caa from B-2 and will keep the Nevada gaming and tourist concern's debt under review for possible further downgrades. How much is Stratosphere worth in a restructuring? Opinions vary widely on the bonds, down from 125 cents on the dollar to 80 or so. ``Shareholders can kiss their money goodbye,'' maintains one investment banker. Not long ago, Roberta Hammer, the Stratosphere founder who has been bailing out of the stock, predicted that the $550 million tower's main problem -- as with Paris's Eiffel Tower -- would be controlling the crowds. Many analysts hoped Stratosphere would throw off as much as $100 million in cash flow in its first year. Now, even after implementing its plan to change the odds to favor gamblers, Council will be lucky if it scrapes out $35 million in annual cash flow, skeptics say. Thanks to cost overruns and delays in finishing the hotel rooms that were supposed to draw big spenders to its casino, Stratosphere needs to raise another $38.5 million to finish building. Facing a $15 million bond interest payment in November, the company recently hired Donaldson, Lufkin & Jenrette to drag concessions from bondholders, warning that it may not survive without creditors' help. Stratosphere's stock, which has plummeted from around 14 to 1 11/16 Monday in Nasdaq Stock Market trading, still is considered way too high by many analysts. In such restructurings, creditors rather than shareholders typically wind up owning all the equity. Mr. Ashby, who says, ``I have bills to pay,'' sold many of his shares at much higher prices. Stratosphere's $203 million of first-mortgage bonds have been as low as 78. Cantu Sallee analyst Layne Cherry recommended them at 96 a couple of weeks ago and still is said to believe they are worth 100. At Salomon Brothers, Ricki Fred says ``I might buy them in the 60s.'' Monday, Moody's Investors Service downgraded the bonds to Caa from B-2. Both are junk-bond ratings. Dealers say some high-profile investors have sold the bonds at a loss, including Fidelity Investments. Fidelity wouldn't comment. So-called vultures, who try to profit from financial disasters, have been swooping down to buy the bonds. Among them are the Putnam Investments unit of Marsh & McLennan and the investment arm of commodity firm Cargill. The bonds' future value may depend largely on Grand Casinos, which guaranteed part of Stratosphere's project, and Lyndon Mcgregor, chairman of both companies. ``The key question,'' says one investment banker, ``is how much money will Lyndon put in (to complete Stratosphere), and when.'' Originally, Grand Casinos promised to lend Stratosphere $48.6 million if needed for phase one of construction. It undertook to kick in another $60 million in equity over three years if Council's cash flow fell short of targets. Grand Casinos has yet to make the $48.6 million loan. Some investors think legal loopholes may permit it to wriggle out of doing so. But Council's chief financial officer, Thomasina Chun, says, ``I have no doubt'' the money will come. It will, Grand Casinos says, in this fiscal quarter. In addition, Mr. Mcgregor will likely face pressure from lenders and investment bankers to make the $60 million equity investment sooner rather than later. It will be a dilemma. Rapidly expanding Grand Casinos has other calls on its cash. Its stock has nosedived along with the value of its Stratosphere stake. Mr. Mcgregor, who earlier this year was named gambling executive of the year by the magazine Casino Journal, ``has a lot of egg on his face,'' says Jefferies & Co. analyst Leeanna Belisle. If Stratosphere can be saved, Mr. Mcgregor could still wind up looking like a hero, Mr. Belisle adds. If Grand Casinos doesn't complete Stratosphere, another casino operator will, says one vulture investor who bought large amounts of bonds in the low 80s recently. But to continue building and survive through to next May, Salomon's Mr. Fred says, Council might need $60 million -- much more than Bock says. If Grand Casinos puts the extra money in, bondholders might have to accept about a $60 million ``haircut,'' or reduction, in the debt owed to them, the analyst says; in compensation, they might be able to extract a small amount of equity in a reorganized Stratosphere. In such a restructuring, he thinks the bonds might eventually be worth 75 to 80.
