Open less than a year,Entertainment Group LLC plans to restructure under Chapter 11 bankruptcy protection, hoping that its $2.4 billion casino and hotel can turn itself around with less debt.
Revel has been key to the Christie administration’s plan to revitalize, with the casino considered a bellwether for a as an upscale beach resort with gambling, aiming to attract affluent vacationers. But now, with the financial restructuring, which analysts say was expected, Revel is expected to revamp its image, promoting itself to slot-players, modifying the strict no-smoking policy in its 1,400-room luxury hotel and offering complimentary rooms to attract more habitual gamblers.
With $1.5 billion in debt and a string of dismal revenue reports, the casino was struggling to meet its debt obligations. It has failed to turn a profit, and last month the company reported its second-worse month for revenues since opening its doors last April.
The company said this week that it has reached an agreement with its lenders on a prearranged bankruptcy plan and will seek Chapter 11 protection as soon as mid-March. Revel's creditors will forgive debt in return for stakes in the newly-restructured company, reducing the casino's debt obligations by more than $1 billion.
Some of Revel’s lenders will also be providing the company with a $250 million loan to help the casino continue operating while under bankruptcy protection, company officials said. About $205 million of that is money the lenders are owed prior to the bankruptcy filing.
According to published reports, once the company emerges from Chapter 11, its lenders, which include Canyon Capital Advisors LLC, Capital Research & Management Co. and Chatham Asset Management LLC, will own nearly all of the casino's equity.
“Restructuring in corporate land really only means there’s a shifting around of ownership and debt obligations,” said Robert Heller, chief executive of Spectrum Gaming Capital in New York. “Sometimes it means a change of management, but they haven’t announced anything around that. There’s been a lot of cooperation between management and the investors here. It seems like a pretty friendly process.”
The company expects to continue its normal business operations. It hopes to complete the restructuring by early summer.
"The reduction of debt service expense this agreement facilitates will greatly improve Revel
s cash flow to better support day-to-day operations," Michael Garrity, Revels chief investment officer, said in a statement. "This restructuring positions Revel for long-term success by providing the Company with the operational flexibility to invest in the growth of our business."
Revel, which some saw as Atlantic City’s best hope for a resurgence, has been struggling for some time. Investment bank Morgan Stanley began the project back in 2006, but abandoned it before construction was completed. The bank wrote down its entire $1.25 billion investment. Five years later, a new group of lenders came in and gave Revel’s CEO, Kevin DeSanctis, $1.2 billion to complete the project.
Some hoped Revel, with its luxury accommodations and fine dining, was going to turn Atlantic City around by bringing in a new customer base, one that hadn’t already been cannibalized by neighboring gambling markets in New York, Pennsylvania and Maryland. They thought it could help turn Atlantic City from simply a gambling mecca into a destination for entertainment and conventions.
But the casino’s non-smoking policy and decision not to give complimentary rooms were unpopular with traditional gamblers. And its boardwalk location and vertical layout – which forces guests to go up and down too much between floors – have kept some guests away, analysts say.
The result was casino revenues that were much lower than anticipated, so much so that both Standard and Poor’s and Moody’s Investors Service downgraded the casino’s debt last summer. Moody's doesn't think the company generates enough revenues on an ongoing basis to pay its debts, and that the additional money it borrowed is not going to be enough to ensure the company's long-term viability.
At the time, casino executives had requested up to $100 million in new financing from its lenders to get it through the rest of 2012 and 2013. That money was in addition to $50 million in capital the casino received from a consortium of banks last spring. In December, investors contributed another $150 million in new debt.
And then came Hurricane Sandy, which shuttered the casino for four days and has put a damper on revenues at all of Atlantic City’s casinos.
In January, Revel reported just $7.9 million in gambling revenue, according to the New Jersey Division of Gaming Enforcement, a 19 percent drop from December and one of the worst performances among Atlantic City’s 12 casinos.
In addition, Moody's again downgraded the company this month , basically because it has asked its creditors for a third time to alter its credit terms in order to avoid defaulting on its loan interest payments.
“I think at this point, the bankruptcy filing was expected. It’s just surprising how quickly it occurred from having just opened 10 months ago,” said Brian McGill, an analyst with Janney Capital Markets. “But once it’s restructured, it going to be a little more competitive with the other casinos.”
The company also plans to tweak its business model, McGill said, making a marketing push to attract more slot-machine gamblers. Plans to allow smoking in some sections and reconsideration of the comp policy will only help Revel, he said.
“They expected people to come out and gamble and then pay for their drinks and hotel, but that’s just not the market Atlantic City had. It’s a market where people go and gamble and ultimately lose and expect to have a portion of their trip comped,” McGill said. “The fact that they weren’t comping has been a real problem.”
When it first opened, the talk was that Revel was going to change the paradigm in Atlantic City, catering to affluent customers who would come to see a show, have a meal and pay for their hotel room, but that’s simply not the demographic in Atlantic City, McGill said.
“A little of that exists at Borgata, but not a lot. That’s just not how the casino markets work,” McGill said. “Revel tried to change the paradigm, but it failed at the end of the day.”
But with 10 swimming pools, along with celebrity chef restaurants, a spa and an upscale mall, Revel isn’t abandoning that high-end concept just yet. The hope, according to analysts, is that with less debt, the casino can buy more time to attract that customer base.
“They’re going to continue to tweak the operations model and the marketing model, but this treats the fundamental problem, that the property had a lot of debt,” said Heller. “This restructuring will take the pressure off of them so they can focus on operations and not just on paying their interest and principal bills.”
Heller said Revel has a lot going for it – it’s a beautiful property, with great restaurants, exceptional entertainment and a beach scene. But other issues are at play in Atlantic City, ranging from the economic downturn to the fact that more competition is springing up closer and closer to where Atlantic City’s regular customers live.
Heller says his 90-year old mother is one of them. She lives in Queens and used to be a regular in Atlantic City, but she now she goes to Resort World Casino, the casino at Aqueduct race track.
“They really need to bring in new customers, which Revel has the potential to do. The problem is, it’s a matter of numbers. It may be too little, too late,” Heller said.
Governor Christie’s office aided the company in obtaining $261 million in tax rebates. In return, Revel was supposed to use that money to fund public infrastructure projects on the South Inlet.
Christie is still committed to the revitalization of Atlantic City, and to Revel, which employs more than 2,000 people, said his press secretary, Michael Drewniak.
“Most importantly, none of those things that make Revel among Atlantic City’s highest-profile attractions will change, as Revel uses this new financial flexibility and the continued backing of its investors to grow the business and be part of Atlantic City’s expansion,” Drewniak said.