Yung had reason to gloat. He had waged a brilliant bidding battle
for Aztar and won. "That guy wanted to win it at all costs," says one
source present at the auction.
Alas, that victory would represent the top for Yung, and it's been a
long way down ever since. Today, Yung is gone, having been ousted from
the management and board of Tropicana Entertainment LLC, the subsidiary
Columbia Sussex created in the aftermath of the Aztar buyout. Tropicana
Entertainment filed for Chapter 11 protection in the U.S. Bankruptcy
Court for the District of Delaware in Wilmington on May 5. And now the
fate of both Tropicana Las Vegas and the Tropicana Casino & Resort
in Atlantic City is up in the air again, making bondholders more than a
little restless. And to make matters worse, the Tropicana Casino &
Resort, which is Tropicana Entertainment's largest source of cash, is
now under the supervision of the New Jersey Casino Control Commission
and may never be within bondholders' reach.
"This is all uncharted territory," says Scott Butera, a gaming
industry veteran who is now running Tropicana Entertainment and sits on
its board.
The rise and fall of Yung is a cautionary tale -- one that begins
with a dramatic and expensive acquisition, runs through massive
management miscues and ends in bankruptcy. In the end, it's the story
of a man drawn out of his element by the glitter and flash of a very
different business who then makes a series of fatal errors, made worse
by an economic cycle that removed any margin for error.
By the time Columbia Sussex purchased Aztar, the company owned 70
hotels, which Yung had assembled through acquisitions in the '70s and
'80s. Yung carved out a management style that could be successful in a
certain kind of hotel: extracting significant cost savings, typically
through extreme job reductions, says one source, who notes, "He cuts
the work force down to the bone." Under Yung, staffers were typically
required to work longer hours for less money. "That's how he
distinguished himself in the hotel business," says the source.
Attempts to contact Yung were unsuccessful, but Butera defends his
predecessor. "He built that company from nothing to a company with over
70 hotels," Butera says. "He is a very successful businessman. I've
spent a lot of time with him, and I know him to be a man of strong
character."
Yung began to dabble in gaming with the 1990 creation of Wimar Tahoe
Corp., a vehicle to purchase and run casinos. Among Wimar's stable of
assets are the Lake Tahoe Horizon Casino and Resort, the River Palms
Hotel and Casino in Laughlin, Nev., the Belle of Baton Rouge, La., and
the Lighthouse Point Casino. Although those properties certainly got
Yung's feet wet in the gambling business, none of them qualified as a
flagship.
Aztar was just what Yung was looking for. It not only had bulk -- 14
casinos in the U.S. and the Caribbean -- but two of its properties were
legitimate trophies: the Tropicana Las Vegas and the Tropicana Casino
& Resort in Atlantic City.
And, of course, there were those undeveloped acres of land along the
Strip. More than two-thirds of the Tropicana Las Vegas' 34-acre
footprint was untouched. "The idea was to get a prime piece of property
at a time when real estate prices in Vegas were at an all-time high,"
says Barbara Cappaert, a senior vice president and high-yield bond
analyst at KDP Asset Management Co., who's followed gaming for years.
A feeding frenzy ensued. Pinnacle, which at the time owned casinos
in Mississippi, Louisiana, Indiana and Argentina, was based in Las
Vegas but lacked a casino there, Cappaert says. It, too, needed a
flagship, and Tropicana Las Vegas would fit the bill.
The undeveloped acreage held another lure. The source at the Aztar
auction explains that Pinnacle wanted to build instead of buy. So the
Las Vegas property would kill two birds with one stone. "That was the
perfect asset purchase for Pinnacle," the source says. "It's a fit they
will probably never see again."
Pinnacle didn't waste time, striking a $2.1 billion deal for Aztar
on March 13, 2006. Priced at $38 per share in cash and including $723
million in assumed debt, the deal would kickstart a bidding war.
Ameristar on April 3, 2006, supplanted Pinnacle as the leading suitor,
offering $42 per share.
Two weeks later, Columbia Sussex showed up, making a $47 per share
bid through Wimar Tahoe that shocked participants and analysts.
"Columbia Sussex was a bolt out of the blue. Nobody expected them,"
says the auction source. "They were an unknown quantity. [Nobody knew]
how much leverage they had, since they weren't public."
But as Pinnacle, Ameristar, and Colony (which, the source indicates,
never made an official bid) discovered, Columbia Sussex wasn't
bluffing. Aztar's price had climbed higher and higher and soon eclipsed
$50 per share; Ameristar then folded. Pinnacle and Columbia Sussex
stared each other down, then Pinnacle folded after Yung offered $54 per
share.
Yung found himself deeply into something very different from hotels.
For one thing, gaming is highly regulated: Each operator must apply for
and receive a gaming license from state authorities. At least one
analyst, Brian McGill of Susquehanna Financial Group LLLP, had
said that in the heat of the battle for Aztar there was "some concern"
over whether Columbia Sussex could get licensed in New Jersey. "In
gaming properties, you have to have integrity, you have to have good
management and you have to run a first-class operation," says the
lawyer for Tropicana Entertainment's bondholders, Ed Weisfelner of law
firm Brown Rudnick LLP.
By the middle of 2007, the gaming industry was flagging. Casinos in
Atlantic City had already been struggling because of a smoking ban and
the emergence of gaming facilities in Pennsylvania.
But Yung pressed forward. To complete his acquisition of the
Tropicana AC, he had to go through a procedure called "interim casino
authorization," says NJCCC spokesman Daniel Heneghan. "It allows you to
go ahead with your business deal while preserving the state's
integrity."
Specifically, New Jersey's Division of Gaming Enforcement, or DGE,
undertook a full investigation of the casino's practices. In the
meantime, Tropicana AC put its casino license into a trust (allowing
Columbia Sussex to close the Aztar deal in January 2007). Once the
investigation concluded, the NJCCC held hearings.
Typically, the process proceeds smoothly. In fact, only once in 29
years of legal gambling in New Jersey has a company's casino license
been revoked. That was in 1989, when the owners of the Atlantis Hotel
& Casino were stripped of their license because of financial
concerns.
Clearly, Yung thought the process would be perfunctory. He was more
focused on the sweeping changes needed at Aztar, given the weakening
economy and payments coming due on the debt Tropicana Entertainment
shouldered to make the deal. He directed his energies at the Tropicana
operation in Atlantic City. He did what he always had done: He began
cutting rank-and-file workers at the hotel-casino. This was a
particularly sensitive issue for Tropicana, since it had already had
issues with its labor unions, according to KDP's Cappaert. "Sometimes,
when you're new in an operating market, you can make a move ... that can
have bigger ramifications because of the history of the market," she
says.
But the Atlantic City workers' union, Unite Here Local 54, wasn't
interested in making history. "The unions [there] are very strong,"
Cappaert says.
The union didn't sue Tropicana Entertainment, and it didn't go on
strike. It did something much more devastating: It launched a campaign
against Tropicana Entertainment's license renewal in New Jersey.
Union members helped compile information from Tropicana customers
about the casino's physical condition, leading to a scathing report by
the DGE that argued that cutbacks had led to lousy service and a fall
in casino revenue. Local 54 also denounced Tropicana publicly,
announcing to media outlets that it was opposed to Tropicana's
licensing. It even lobbied the New Jersey Legislature for support and
pleaded with the NJCCC to be part of the licensing hearings, which
began in November. "The involvement of the union was a little out of
the ordinary," says one source. "They normally don't get involved in a
licensing hearing."
Tropicana AC's dirty laundry -- literally -- was aired, exposing not
only problems with its overall cleanliness but also ugly details about
how the casino was managed and how it responded to requests from
regulators. Among other things, customer reviews cited in the DGE
report criticized the casino for roaches, bedbugs, dirty floors and
overflowing garbage pails. Tropicana AC has disputed the use of the
reviews.
"The impact of the union's activities to kill our business [is]
really working," Yung said at a hearing before the NJCCC on Nov. 21. He
also claimed layoffs didn't have "anything to do" with the decline in
Tropicana's AC business. "They ... ought to be proud of that," he said of
the casino's unions.
They were more livid than proud. Yung had laid off about 1,300
employees at the Tropicana AC by October, saving roughly $40 million.
Despite the Yung-bashing over the job cuts, Butera believes they
were among the unpopular things he had to do because of the dramatic
shift in the casino market, which was making it much more difficult for
the company to come through with its debt payments.
The campaign by the unions only gained steam as the hearings
progressed, but what irked the NJCCC and DGE the most wasn't that too
many security guards got the ax, but that the Tropicana in Atlantic
City lacked a functioning independent audit committee for the first six
months after Columbia Sussex assumed control -- flouting the state
Casino Control Act requiring such a thing -- and that Yung lied to the
NJCCC about the extent of the job cuts.
Court papers depicted Yung telling two different versions of his
plan to cut staff, one for investors, the other for NJCCC. Upon
applying for interim casino authorization in 2006, Yung testified there
"might be some layoffs" but that most of them would come through
attrition. However, when looking for financing, Yung told investors
that there would be between $30 million and $40 million in savings to
be had by slashing staff, as well as other expenses.
Even more damaging were revelations from former Tropicana AC
president Fred Buro about a conversation he had with Yung. After
preparing for yet another round of job cuts, Buro called Yung from his
cell phone to say he had just visited with regulators since it was his
"duty" to do so.
"Bill, we have to inform the regulators," Buro testified on Nov. 28
he told Yung. "It's our duty, it's our responsibility. It's my duty to
protect this asset, to protect you, protect your license, the
property's license."
Yung, Buro testified, responded, "I told you not to tell the
regulators. Now you go back and make these cuts or I will find someone
else that will."
Last August, Buro was fired.
"He was caught in a couple of lies," Weisfelner says of Yung. "And
for an agency responsible for ensuring that casinos are owned and
controlled by people showing the highest degree of integrity, I think
blatant falsehoods really rankled them."
The hearings dragged on through November and December, leading to a
Dec. 12 decision that would send Tropicana Entertainment spiraling
toward a Chapter 11 filing. The NJCCC didn't mince words in its ruling.
Citing a "lack of business ability, a lack of financial responsibility,
and a lack of good character, honesty and integrity," as well as a
record of regulatory compliance that was "abysmal," the commission
stripped the Tropicana AC of its gaming license. The casino was then
placed under the control of Gary S. Stein, a former New Jersey State
Supreme Court judge, with the mandate to sell the facility. "It reeks
of a lot of the complaints the unions lobbied for," Cappaert says of
the NJCCC's "extraordinary" decision. "The company probably just
assumed there's no way that they'd lose the license."
The timing couldn't have been worse for Tropicana Entertainment. As
Cappaert points out, Yung and the company had been "laying the
groundwork" to go public. "It's too bad," she says. "I think their
intentions were good. The piling on that they're getting as a result of
the [lost] license, I think it's a little too much."
But there was blood in the water, and Tropicana Entertainment
bondholders started circling. They hired Weisfelner almost immediately
to analyze the bond indenture to see whether the license revocation
represented a default or, at the very least, a prospective one. The
NJCCC's decision had already triggered a default on about $1.3 billion
in Tropicana Entertainment senior debt, leading the company to begin
damage control and talks with its lenders on how to resolve the
situation and gain more breathing room.
The immediate solution for Tropicana Entertainment was to put
another casino on the block: the Casino Aztar in Evansville, Ind. (The
company had already struck a deal for the Horizon Casino in Vicksburg,
Miss.) It also needed to obtain a waiver on its senior debt. Yung told
the banks that, by selling the two casinos and the one in Atlantic
City, he could generate enough proceeds to retire the debt and position
Tropicana Entertainment for long-term growth.
Unfortunately, Yung never took the trouble to discuss the plan with
bondholders. "Yung went out of his way to publicize [that] in his view,
his problem was isolated with the banks," Weisfelner says.
The banks appeared to be "pretty well covered" in terms of
collateral value, he notes, while bondholders were "ignored."
Weisfelner adds, "There's a lot of mistrust."
The Tropicana Entertainment bondholders were already peeved at Yung
because of the New Jersey situation. They worried that the company's
largest producing assets were being put on the block on a forced-sale
basis and were scared that the company would try to cheat them out of
equity value in the Las Vegas property.
Their anger only intensified as Yung continued to stonewall them.
The bonds are a so-called fulcrum security, which means they are the
first security in the Tropicana Entertainment capital structure in
which there's not enough collateral to pay off holders in full (for
example, if first-lien lenders are getting paid in full in cash, but
second-lien holders are getting 50 cents on the dollar, the second
liens are holding the fulcrum security).
As Weisfelner says, in a situation where the bonds are the fulcrum
security, a company will typically organize talks and agree to pay the
fees of the bondholders' attorneys while negotiations progress. But
Yung never made either gesture.
So the bondholders had to force their way to the negotiating table.
How? By filing a lawsuit against Tropicana Entertainment in the
Delaware Court of Chancery on Jan. 28. "We became convinced that there
was an immediate default under the bond indenture," Weisfelner says.
At first, that assessment appeared far-fetched. Tropicana
Entertainment went on the offensive, calling bondholder assertions that
a default took place "simply untrue." The company argued that the
bondholders had no right to demand immediate payment and that their
actions were jeopardizing the sale of the Tropicana AC. What also
appeared to undermine the case of the bondholders was the lack of a
provision in the bond indenture that addressed a revocation of a gaming
licensing.
"As long as you're current with your bondholder payments, and
technically there's nothing else in the indenture [describing a
default], they can limp along, say it's not fair and it doesn't
matter," KDP's Cappaert says.
Undaunted, bondholders based the suit on five grievances, two of
which dealt with an alleged technical default of the indenture.
Specifically, bondholders argued that by putting the Tropicana AC under
Stein's control, the NJCCC had actually triggered a "disposition of
assets," because the stock of Tropicana Entertainment's Adamar of New
Jersey Inc. subsidiary had been placed under Stein's care as well.
Because of that default, the bondholders contended they had the right
to accelerate their debt after 60 days from the time they first
asserted a default had occurred.
Though Chancery Vice Chancellor John Noble agreed that the indenture
contained no provisions alluding to a gaming license, he argued that
"it does not necessarily follow that every consequence flowing from the
loss ... is immunized from the reach of the indenture's requirements.
"If a collateral consequence of a license nonrenewal or denial
triggers a default provision, the issuer will not be protected merely
because the initial precipitating cause was the nonrenewal or denial of
the gaming license," he wrote.
Noble reasoned that while appointing Stein didn't create a default
by itself, one was tripped when assets were handed over to him,
constituting an asset disposition under the indenture that is
considered a breach of the agreement. "Title was transferred; the
casino assets were disposed of; and the remaining elements of an asset
disposition have been satisfied in accordance with the words of the
indenture," he wrote.
In his Feb. 28 ruling, Noble decided that the bonds weren't in
default immediately. But he did subject Tropicana Entertainment to a
pending default, or one that could be asserted at the end of a 60-day
period that had already half-expired.
The door was thus flung open for the bondholders. As Weis-
felner recalls thinking, "Now Yung's got to focus on us, because the clock is running."
Tropicana Entertainment didn't exactly sprint into action. It
appealed its license revocation to the Appellate Division of the New
Jersey Superior Court on March 4, which was nearly three months after
the NJCCC ruling. Then Yung and Stein tried a maneuver that sources say
incensed the commission again. Rather than appeal Noble's decision,
Tropicana Entertainment had Stein go back to the NJCCC to try to get it
to approve a method of curing the technical default.
Stein asked the NJCCC to "reconvey," or transfer, the title of the
Tropicana AC back to the Adamar subsidiary. The transfer would have
served to eliminate the disposition of assets and thus cure the
default. But it didn't pass the smell test with the commission, which
one source says "excoriated" Stein for taking such a position. "Our
gaming counsel said this was undoable as a matter of gaming law,"
Weisfelner says of Tropicana Entertainment's title transfer attempt.
"The commission said [to Stein]: 'This is between the bondholders and
Yung. You have no business getting involved in it.'"
Weisfelner says Yung further complicated things by firing his legal counsel, Milbank, Tweed, Hadley & McCloy LLP.
Tropicana Entertainment was really left with only one option, which
was to file for bankruptcy. That eventuality gave bondholders the
leverage they had been seeking. Tropicana's secured debt was originally
scheduled to come due on April 20, but bondholders agreed to a
forbearance, if only because they felt the company was ill-positioned
at the time to file for Chapter 11. "We didn't want [Yung] to file for
bankruptcy without dealing with and making sure that the regulators all
over the country were on board," Weisfelner says. "The last thing we
wanted to see was regulators yanking licenses and shutting down
operations."
Kirkland & Ellis LLP was hired to be Tropicana
Entertainment's debtor counsel, and the firm got to work on staging the
largest bankruptcy filing of the year.
Tropicana Entertainment already had Butera, a seasoned hand at
complex gaming bankruptcies, in the corporate suite. He was the CEO and
president of Trump Entertainment Resorts Inc. during its messy
2004-2005 Chapter 11 case and effectively revamped Donald Trump's
Atlantic City casino empire. He was serving as the chief operating
officer of the Cosmopolitan Resort & Casino in Las Vegas when his
phone rang in February.
Tropicana Entertainment's investment banker, Lazard,
recruited him for the top spot. "They were looking for someone to
spearhead the same kind of thing [as what happened with Trump]," Butera
says.
Butera was introduced to Yung and took the job, knowing all about
the NJCCC's decision and Tropicana Entertainment's hostile relationship
with bondholders. But Butera saw a hidden gem. "It was a very big
opportunity," he says. "You've got the fundamentals of a very good
company."
With Butera in place, the papers ready and a $67 million debtor-in-possession loan available from Silver Point Finance LLC,
Tropicana Entertainment made its filing. Not included in it, however,
was Tropicana AC, since it was no longer under Tropicana
Entertainment's corporate umbrella.
Again, Tropicana Entertainment tried to get out in front of the
situation, claiming in first-day motions that a perfect storm of tough
financial conditions had victimized the company. Too much debt, a steep
drop in consumer spending and declining real estate values all
conspired against the company, and then the cruelest slap -- a "very
public, political and vociferous campaign" by the unions.
"We obviously got caught in a very bad market," Butera contends.
"Yung bought it at the height of the market only to have to operate it
in the trough of the market."
With Tropicana Entertainment now in bankruptcy, the bondholders
started viewing Yung as a major distraction and wanted him out. Soon
after the filing, Weisfelner didn't even try to disguise the
bondholders' intention. "If Yung wasn't there," he said, "I think the
restructuring would fall into place fairly quickly and without
contentiousness."
The bondholders launched their attack by asking the Delaware court
to oust Yung in favor of a trustee, alleging he carried out "grossly
misguided business decisions" with an "autocratic and contentious
managerial style."
Tropicana Entertainment countered with the proposed establishment of
a Butera-headed five-member board, with Yung holding a seat that was to
be considered a nonofficer position. The matter headed to a three-day
trial in the beginning of July but was diffused after the first day of
testimony, when Butera, Kirkland and the bondholders came to a
settlement under which Yung would be ousted and the other four board
members -- Butera, Thomas Benninger, Michael Corrigan and Bradford Smith
-- would all stay. The bondholders, in return, dropped their demands for
a trustee.
"From all of our perspectives, not having a trustee was very
beneficial," Butera says. "The trustee was a wild card, and I think it
was important for us not to lose momentum."
An order approving the settlement was entered on July 3, and while
Yung still holds all the equity of Tropicana, he will be hard-pressed
to retain any piece of the casino conglomerate he amassed. Most of the
time, reorganizations end with equity holders getting wiped out unless
they either buy into a more senior piece of the debtor's capital
structure or find a way to get all of the company's debt paid off.
In fact, Yung wouldn't get anything until the bondholders are paid
back in full. "As it stands now, bondholders would recover less than
par," Cappaert says. Adds Weisfelner: "Frankly, I think he's out of the
money big time."
Even though Yung is no longer on the scene, bondholders hardly have
a clear path to determining their recovery. Tropicana Entertainment's
stable of assets, including the Tropicana AC, twists in the wind.
Though Stein allegedly drew offers from several prospective buyers for
the hotel-casino -- among them Colony Capital; a group formed between
Baltimore developer Cordish Co. and former Tropicana AC
executive Dennis Gomes; an investor group led by New York developer
Joseph Palladino; and Mohegan Sun -- the state of the market and the
lack of leverage on Stein's behalf led to bids that he determined were
unsatisfactory.
Says Weisfelner, "It's in everyone's interest to buy more time for
regulators to see those sales get done in a meaningful way, without
having to hit the bid on the low-ball bids we've gotten."
The NJCCC has given Stein more than one extension to sell the
Atlantic City casino (his original engagement required a sale within
120 days), but bondholders have moved for a different, and perhaps
unprecedented, tack. They have asked the bankruptcy court whether they
could initiate discussions with the NJCCC and the DGE in an attempt to
get the Atlantic City casino returned to the now Yung-free Tropicana
Entertainment and include it in that bankruptcy case. Just how
Tropicana Entertainment would adjust its case with Tropicana AC's
involvement is unclear. But the company would have to develop a plan
and structure the agencies agreed with.
"With Yung gone, I think all of the legal complications to reconveyance are likewise gone," Weisfelner says.
Then there's Tropicana Las Vegas, still the main prize. It's likely
it would take more than a Section 363 sale under the federal Bankruptcy
Code to truly unlock the potential, and the value, that resides with
that property. "The number of people that can afford to buy it is a lot
more limited than when Aztar was on the market," the Aztar auction
source says. "It's a beautiful asset, but you need deep pockets and
lots of patience."
That won't please Tropicana bondholders, but their only choices may
be to wait or unload at bargain prices, with the bigger gamble being
the former. But on the strength of the Vegas acreage alone, it may be a
bet worth taking.
Comments
The halcyon days when real estate endlessly rose seems a long way off. But it was only a little more two years ago when Phoenix-based Aztar Corp. found itself to be one of the hottest commodities in Las Vegas. Aztar, the owner of a casino empire stretching from New Jersey to Sin City, owned a 34-acre Tropicana Las Vegas property containing some of the last undeveloped real estate along the Strip. Rivals drooled at the prospects.
I knew Yung was bad for business when he bought out Del Webb's High Sierra and turned it into the Horizon. I worked at Del Webb's until Yung took it over on January 10, 1990. It was a rocky start, but I chose not to continue working for Yung, Boy am I glad because he was just some rich bastard at the time, and I knew he was a crook. I am so glad I quit, even now, even though I had a stroke and wound up in Reno. Yung was just too much a crook dressed up in regular clothes.