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LAS VEGAS-Minority lenders in the Station Casinos Inc. bankruptcy case this week asked for an independent examiner to investigate the decisions being made by Station management and its main lender, Deutsche Bank. A hearing on the motion is scheduled for the end of the month.

The minority lenders allege that the “stacked” corporate structure created to take the company private in 2007 is no longer viable because the common management cannot act in the best interest of the OpCo, PropCo and LandCo entities at the same time when each is bankrupt and has separate debt obligations.

The minority lenders says Deutsche Bank, the main lender, is in the same position as the common management due to it being not only the agent for a $900-million secured “OpCo” parent company loan agreement that includes the independent lenders but also a major lender for both the separate $2.475 billion “PropCo” loan covering four of Station’s 18 casino properties and a separate $250 million “LandCo” loan.

“While the…structure probably worked well when each stack was solvent back in 2007, it no longer works in today’s environment, when each stack is insolvent,” the minority lenders state in their motion. “When the debtors were solvent and meeting all of their financial obligations, it was not problematic for them to be run by common management and to engage in intercompany transfers and transactions that moved value from one stack to another.

“With each stack now deep within the zone of insolvency [and having been there for some time], there can be no dispute that the fiduciary duties owed by the Station Groups’ directors and officers have expanded to include duties owed to creditors in each of the three stacks. The problem is that while management is the same for all three stacks the creditors are not. Consequently, such [intercompany transfers of value] have the potential to unfairly, and improperly, shift value from one stack to another, and thereby benefit one stack of creditors at the expense of another.”

As currently organized, the OpCo [Station Casinos Inc.] is the indirect 100% owner of the PropCo and LandCo. Detailing one of its concerns, the minority lenders say that as part of the transaction that took the company private in 2007, OpCo or affiliates thereof transferred to PropCo the Boulder Station, Palace Station, Red Rock and Sunset Station Casinos, and PropCo then leased the properties back to OpCo for an initial term of 15 years at $250 million per year, and OpCo subleased the properties to non-debtor operating subsidiaries.

“In today’s markets, it is not uncommon for a property owner to have over-encumbered real estate, or for a tenant to be party to a lease signed at market peak that no longer works economically in today’s economically depressed environment,” the minority lenders state in their motion. “But what is uncommon is what we have here: a situation where the tenant stuck in the above-market lease is a debtor in possession that is taking no action to either a) exercise its rights under the bankruptcy code to reject the lease; or b) use the leverage provided by the bankruptcy to renegotiate the lease.”

The plaintiffs go on to argue that as a result of the different creditors in the different stacks, if a reduction in rent were negotiated the OpCo creditors would benefit significantly, but only at the expense of the PropCo lenders, of which Deutsche Bank is the largest.

“Since OpCo and PropCo have common management, when considering what to do about the master lease, management is presented with a Sophie’s Choice: Which child should suffer?” state the minority lenders in their motion. “Management’s answer, predictably, is “neither.” And this is exactly what we have seen so far; SCI and OpCo continue to pay the over-market rent at a rate of almost $21 million per month…while management makes no apparent effort to reject or renegotiate the lease (with itself).

“The problem here is that…every time SCI pays the over-market rent to PropCo, in effect it is making a “gift” – in the amount of the excess rent–to the insolvent PropCo’s creditors, at the expense of OpCo’s creditors. And since SCI is an insolvent debtor, it is in no position to be making gifts to anyone.”

This is just one of several examples that have the minority lenders wanting an independent investigator. They also cite management’s continued rejection of Boyd Gaming’s expressions of interest in acquiring all or part of the company despite its original argument for the rejection–that a pre-packaged bankruptcy would be better–now being a moot point. In addition to the lease arrangement, here’s what the minority lenders want investigated:

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