Two high-yield gaming companies were in the market with deals last week as the primary market heated up. Demand for junk bonds remained high with investors moving down the credit curve to capture yield.
* American Real Estate Partners , mostly controlled by financier Carl Icahn , sold $200 million in eight-year senior secured notes (B2/B) via Bear Stearns . The deal is a so-called consolidation and dividend offering whereby American Casino and Entertainment Properties , a subsidiary of American Real Estate, is raising the debt as part of its consolidation of three Las Vegas properties. Specifically, American Casino will use the proceeds from the bond offering to buy the Sin City properties from Icahn and other investors for nearly $126 million, representing a dividend payout to them. Roger King , an analyst at CreditSights , notes the fact that this kind of offering could get done signals the peak of a market. He adds companies that sell dividend deals may do well if the money is re-invested in the company, but otherwise there is a heightened risk of default.
* Premier Entertainment Biloxi issued $150 million of '12 notes (B3/B-) that were priced at a coupon of 10.75% to finance the development of a Hard Rock casino in Mississippi. Banc of America Securities and Citigroup Global Markets led the offering, which was priced at a discount at 98.6 and rocketed to 108 on the break. The bonds are rated Caa2 by Moody's Investors Service . "This is the first time I can remember in 10 years that a new deal has broken 10 points higher. The market is feeling very frothy and probably needs to take a breather at some point here," says Tom Lapointe , high-yield portfolio manager at Columbia Management in Boston. Premier Entertainment will use the cash to buy the rights to the Hard Rock name from the Rank Organization Plc ., which has ownership rights east of the Mississippi River.
The offering also drew interest because a portion of the proceeds will be put into an escrow account to pay bondholders their first four coupon payments. This structure is rare, according to Marty Fridson , ceo of FridsonVision . He states that even though the escrow account may be positive for bondholders in ensuring coupon payments, by putting a portion of the proceeds into the account, the company is using up part of its borrowing capacity. In addition, the issuer pays fees based on the size of the entire deal and not just what it uses for capital expenditures. One investor also voiced some concern that, with 12 casinos currently in the Biloxi area, Premier Entertainment is entering a saturated market.
