Sign of the times

Times are changing in Detroit. General Motors Corp., Chrysler LLC and several automotive suppliers are in the midst of Chapter 11 bankruptcy. A new mayor, former Detroit Piston and automotive supplier executive Dave Bing, recently took office following the criminal prosecution and resignation of Detroit's former mayor Kwame Kilpatrick. In light of the distressed auto industry and Detroit's historic reliance on that industry, a logical conclusion would be that Detroit's casinos have followed a nationwide trend of declining gaming revenue. Instead, however, Detroit's casino revenue has remained relatively level, declining by about 4% in 2009, with all three casinos reporting respectable revenue for April. MGM Grand Detroit reported $44.2 million; MotorCity Casino, $38.5 million; and Greektown Casino, $28.6 million.

Although the Detroit casino market is bucking the national trend of double-digit revenue declines, it is still possible two of the three Detroit casinos could have new owners by year's end. MGM and Greektown both appear to be seeking suitors, albeit for converse reasons.

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Years of financial distress led Greektown to file bankruptcy in 2008 in the midst of constructing its 400-room hotel and completing a gaming floor expansion. Greektown owes about $777 million to creditors and lenders, with nearly $220 million in loans occurring during bankruptcy to allow the casino to complete construction. A recent round of bidding for the property resulted in many offers that Greektown and its advisers reported to the Michigan Gaming Control Board as not adequately compensating for the property's performance. Rejecting those bids compelled Greektown to shift more efforts to designing a plan that allows for restructuring its current debt and ultimately led to the reorganization plan filed in U.S. Bankruptcy Court on June 2.

The casino's reorganization plan provides for its secured creditors -- to which Greektown owes about $340 million -- to convert their debt into equity in the property and take 100% ownership of the casino. Along with the equity, the new owners would assume $220 million in loans the casino has received from Merrill Lynch since entering bankruptcy. Like many other businesses in Detroit, Greektown is at a crossroads and must decide whether to attempt to reorganize or sell the property. The end result of the bankruptcy plan will likely still be a sale of all or part of the casino -- either for the creditors to divest their interest or to raise capital to service the debts assumed under the reorganization plan. With that in mind, it appears a likely scenario that Greektown ultimately will conduct another round of bidding for the property during the second half of 2009.

On the other end of the spectrum sits MGM Detroit. The casino is thriving and historically has generated the highest revenue among Detroit casinos. Its parent company though, Las Vegas-based MGM Mirage, is hemorrhaging money due to declining worldwide gaming revenue and expenses at the Las Vegas CityCenter property. CityCenter is the 17 million-square-foot mixed-use complex on 70 acres on the center Strip in Las Vegas. The ambitious $9 billion project is the largest privately financed construction project in the U.S. and unfortunately broke ground at the same time that Las Vegas casinos began experiencing a decline in revenue.

MGM Mirage recently settled a lawsuit filed by its CityCenter partner, Dubai World, after the CityCenter partners negotiated a deal with their lenders that includes a waiver of financial covenant requirements and extended leverage restrictions on its $7 billion senior credit line. Under the terms of the deal, senior lenders will be repaid $100 million, and MGM will give them security interests in MGM Detroit, Gold Strike Tunica in Mississippi and undeveloped Las Vegas Strip land.

Although this deal removes some of the immediacy for raising capital, MGM Grand still faces a hefty $13.5 billion debt load and, depending upon whether gaming revenue in its Las Vegas properties continues to decline, MGM Mirage likely will be faced with the prospect of collateralizing its other holdings or attempting to raise capital by selling profitable properties, such as MGM Detroit -- which is considered one of the most profitable.

Given current market conditions and the specific circumstances faced by Greektown and MGM Detroit, it seems reasonable to anticipate that one or both could be sold during 2009. Although investors buying a billion-dollar casino property in Detroit presumably will have a team of advisers and army of lawyers guiding the transaction, other sophisticated casino buyers have found the labyrinth of regulations in Michigan particularly cumbersome. Lawyers and advisers working on the deal would handle the necessary acquisition negotiations, real estate and environmental matters, securities law compliance and financing negotiations, as well as licensee application materials with the Gaming Board.

The Michigan Gaming Control and Revenue Act was designed to be the nation's most stringent casino licensing law. The Gaming Board and its staff pride themselves on strict interpretation of those laws and corresponding administrative rules. Among the onerous aspects of casino licensure in Michigan is the Gaming Board's personal disclosure form that is required for any person deemed a "key person." Key persons essentially include anyone directly or indirectly owning 1% of the acquiring entity, along with all officers, directors and managerial employees of the entity and its parent corporation.

The criticism of the personal disclosure form has been the depth and breadth of information required. The Gaming Board seeks information regarding all business entities in which the key person owns greater than 5%, as well as information regarding that person's criminal and litigation history.

Applicants must identify all immediate family members, including specifically identifying those employed by a government entity. With regard to personal assets, the disclosure form requires documentation of all assets and liabilities, including cash, loans, stocks, bonds, notes, business investments, real estate and any other financial information that may be relevant.

One of the most contentious disclosure requirements is for applicants to provide information regarding all political contributions within the past five years. An interesting wrinkle in Michigan's Gaming Act precludes a casino license applicant or the applicant's immediate family from making political contributions to any state or local campaign during the year before applying for a license. Notwithstanding the First Amendment implications, the prohibition has withstood previous legal challenges and creates an imposing hurdle for prospective suitors, many of whom are politically active and regularly make contributions to state and local candidates.

The lawyers and advisers working on the deal likely would handle the necessary Gaming Board forms and submit required information. The added regulatory maze, however, layers another level of document compilation and preparation onto an acquisition that almost certainly will involve inherent complexities on the financing side, particularly because the Gaming Board must approve debt transactions.

Another hurdle is dealing with unpredictable City of Detroit politics, which likely must be navigated to renegotiate the development agreements that each Detroit casino is required to maintain with the city. The development agreements all include numerous covenants and negative covenants with regard to the casino's operations and requires the governing board to satisfy certain composition requirements, including race, gender and residency restrictions. The development agreements also require each casino to provide notice before transferring ownership, and it is possible an ownership transfer could necessitate a new or renegotiated development agreement.

Couple Michigan's complex gaming regulatory scheme and City of Detroit politics with circuitous liquor licensing requirements, secretary of state registration and the Justice Department's application process, and potential buyers may quickly discover that obtaining acquisition financing is the easiest piece of the puzzle. On the bright side, Detroit's three casinos have historically combined for more than $1 billion in annual gross revenue, so a savvy buyer could end up with bargain prices for a business that, albeit not as recession-proof as once thought, likely will continue to recognize significant revenue over time.

Jason Hanselman is a partner in Dykema Gossett PLLC's regulated industries department who specializes in gaming law and represented the entity that acquired a Detroit casino in 2005, participating both in acquisition financing negotiations and the regulatory approval process.

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