By Christopher Briem, on May 16th, 2012
So most skipped over the story of how Neil Bluhm may be buying out the remnant of the late Don Barden’s ownership group down at the Rivers Casino.
Don Barden had a diverse mix of equity ownership, but it was still highly leveraged and in the end the collapse of some Lehman Brothers financing undid his ownership of the enterprise.* At its nadir Neil Bluhm came into the picture provided the capital to keep the enterprise going, but with Barden and his ownership group becoming a very minority owner.
Who had Don Barden recruited into the original mix? One of the more interesting players was the Retirement System for the City of Detroit. They originally were not directly equity owners but had this loan guarantee which made them some $$ if their backing was never needed. Of course it didn’t work out that way. When all imploded, their loan guarantee cost them money and in return they got a small bit of the equity already well diluted in Don Barden’s shell. Just last year the ownership of that group was restructured and the Detroit pension system had to put up $54 million in cash. See: Investor’s Double Down on Rivers Casino.
I can’t tell from the reporting if the latest machination includes Bluhm buying out the equity of the pension system or not. Below is the picture of how the refinancing/recapitalization worked out. Only a dotted line out to the Detroit Pension folks. Beware the dotted line may be one lesson. Who knows what the Detroit pension funds are holding the remaining casino investment for on their books. If the pension system’s equity does get bought out, one thing that likely will result is that they will have to reconcile the value of the asset on their books; likely a small fraction of what they put in at any point. It is a loss that has already not gone unnoticed in Detroit.
Given that it the pension system’s investment started as a loan guarantee, it was in a sense a highly leveraged derivative not all that much dissimilar to what has put JP Morgan the news of late. Sort of like they sold a put they never expected to be in the money. They could pocket the up front premia and walk away. As much as I can tell from the superficial reporting on the JPMorgan fiasco, I think they were selling selling credit default swaps with a presumption they would not be needed and in a nearly idential way the bet turned sour.
The result is that the pension system’s IRR must be a big negative percentage of their original ‘investment’ at this point. Will we ever know what their potential % loss was? Even though the Detroit Pension system has a lot more openness than say the City of Pittsburgh’s pension system.. probably not. Speaking of openness, note that the city of Pittsburgh has not put out for public consumption any investment info since 2010. In Detroit at leastyou can read their monthly or more frequent board minutes.
So what eh? The City of Pittsburgh isn’t actually violating any law or regulation in putting out so little information. Pennsylvania has literally over 3200 individual pension funds out there. … It remains a big mystery not only why the public knows so little about what the specific investments are in all of them… but why nobody ever cares to ask. I have to bet that if there was a comprehensive look at all the specific investments made by all those plans there may be a few surprises in the details.
* as disclosure I once worked at Lehman Brothers, though I couldnt begin to tell you who put money into casinos. Straight LIBOR derivatives is all I got close to.
By Christopher Briem, on May 14th, 2012
Big day Monday up at the other end of Cleveburgh. Some day someone is going to have lots of fodder for a paper on the spatial patterns of local casino markets. What do I mean? Up in Detroit the headlines are all about how: Ohio’s new casinos could cost cash-strapped Detroit $30 million a year, analysis predicts. The analysis comes from Mckinsey and it is not alone. It is the same concern up in Erie. In Pittsburgh before it was built the notional new local casino here was expected to draw most of its business from a cachement area of 150 miles or less. How close is Cleveland? or more importantly, how much of population within 150 miles of Pittsburgh is also within 150 miles of Cleveland? Break out the compass and dividers.
According to the AP, it is such a big deal that: Cleveland Casino may begin Rust Belt revival. Really? They are not dumb up the turnpike there, they know full well what some of the indirect economic impacts are likely to be. They also know some of the odds. Once they get going it is going to be interesting to compare the payout rates for slots up there vs. here.
In the end it may all be about the food. One thing that may be a real competitive advantage up there…. the spread. Speaking of competitive advantage, the bit of underappreciated news from last month is that down in West Virginia they seem to have implicitly voted for keeping their casino instead of having to move it to attract the ethylene cracker that was big news here. Voting with their (virtual) chips is one way to describe it.
And Inspector Renault may not be as prolific as Yogi Berra (Happy Birthday Yogi!) but he was just was wise. Funny how they are already squabbling over the money the new casino may bring in up in Cleveland.
A bit non sequitur, but speaking of Cleveburgh… from last year, but after my oped on Cleveburgh that was in the Cleveland Plain Dealer, I didn’t notice this very anti-Cleveburgh piece from NE Ohio: This idea is the Pits. All I can say is folks read some things a bit too literally. I saw some commentary back then on the piece that suggested I was proposing some sort of Cleveland-Pittsburgh government be formed and how bad that would be. Yeah, that is what I was proposing??
By Christopher Briem, on April 27th, 2012
One of the owners of the Rivers Casino says the business is a terrible investment. Just terrible. In context you can’t ignore that the statement is made as part of litigation to lower the property’s assessed value for tax purposes.
So here is the deal. Maybe he is right, maybe he isn’t. The Rivers Casino could be an awful investment or a great one. What is a bit clearer is that the value of the casino has only gone up since he invested in the business. When Don Barden and his coinvestors were supplanted as the equity owners of the casino there still were not table games in PA casinos. No assurance there was going to be table games in the future. Table games have been very very lucrative for Pennsylvania casinos. Not only do tables games incur a lower tax rate on gross revenues but they bring more people through the door which has been pushing up slots revenues as well. Add in the deteriorating economy at the time and other reasons to think that the price paid at the time was actually pushed down from what it might have been a year earlier or a year later. One way or another the value of the casino has gone up since that investment was made.
Consider that if it was a bad investment, the new owners were clearly warned of that fact by just how well all the previous investors fared. The ‘bad’ part of the investment was not hidden and assuming the investors were not unsophisticated they took all the available information into account when deciding what price to pay.
Remember it was not just the late Don Barden who took a bath, but his co-investors and even the folks who backed the loans he took out. That would include the Detroit public pension system.. someone may need to check to see what the outcome was of that story. The point is that the casino was probably worth what it was paid by the new owners at the time they made the investment.. and the whole enterprise can only have increased in value since.
Recall Don Barden’s financing scheme for the casino early on…..
By Christopher Briem, on December 9th, 2010
Maybe I misunderstood, but I sure thought the message when they were changing the law was that table games were going to change everything. Looking at the data thus far, granted it’s a little early, I’m not seeing it. Is that a peak already…. or an aberration?
Monthly Table Games Total Gross Revenues by Month - Rivers Casino – 2010
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