Two grim options ahead for Star Entertainment as funding falls through

NSW pulled the pin on Star’s much-needed financing deal leaving Star boss Steve McCann with limited options. This is what comes next.

Star’s Hong Kong partners remain keen buyers of Brisbane’s Queen’s Wharf. Picture David Clark

The dramatic collapse of Star Entertainment’s $940m financing deal is the latest twist for the troubled casino operator. And in a drawn out story that’s been chock-full of twists, this could be shaping up as the final cliff hanger.

A financing package with Melbourne’s Salter Brothers sensationally fell apart after the NSW government refused to cede first ranking security over their 99-year lease that Star’s Sydney casino and surrounding hotels sit on.

NSW’s refusal, revealed by The Australian, comes after the Minns Government agreed to a separate $450m bank-led financing package in September last year.

At the time, that loan was written under similar terms to Salters – that is, the lenders demanded additional security, and they got it. However, the September loan demanded just $100m security across Star’s assets, which was regarded as manageable.

Salter’s super-sized loan naturally demanded significantly more security over Star’s hard assets. This is what prompted the Minns government to baulk, fearing taxpayers could be left with no security over taxes and rent in the event of a collapse.

At the current rate of cash burn Star won’t make it to Easter. Picture David Clark

Without a financing deal in place and with the casino quickly running out of hard cash, the countdown clock is again running over Star’s survival. Some have spoken of a week left, those much closer to the casino’s books say there’s enough for two. One way or another, at its current rate of cash burn, Star won’t see it through to Easter.

Star’s current bind raises a serious question how its board led by Ann Ward can keep it hanging on. It is pushing the boundaries of Australia’s safe harbour rules that gives boards conditional protection to allow a failing company to trade out of their problems. A lot needs to go right for Star to return as a going concern. But Star’s luck started running out a long time ago.

It barely has support of its lenders; it doesn’t have new cash facilities in place; there’s more cash going out than in; and as it has found, asset sales are complicated and take time.

And with the only tangible financing option available to it demanding to keep Star intact, this puts its Brisbane asset swap proposal up in the air. This means its Hong Kong partners will want to claw back their $45m advance that was aimed at keeping Star alive long enough to finalise their move on Brisbane. At the very least there’s a break fee of up to $18m if Star reneges on the Brisbane deal.

Two options

The loss of its financial lifeline has left Star with two options. And both are grim.

The one that Star’s board is racing towards is going back to buyer of last resort, Bally’s.

The mid-sized US casino operator has a reputation of deliberately targeting casinos struggling under debt or already collapsed, a model that has so far delivered it 19 casinos and a foothold in Atlantic City and a new casino in Chicago. It is also building a resort style casino in Las Vegas. Bally’s made a lowball pitch to take a controlling stake in Star last month with a $250m convertible note and an eye to moving higher.

Bally’s itself rescued from bankruptcy more than a decade ago – is backed by hedge fund manager Soo Kim. Earlier this year Kim quietly conducted his own tour of Star’s Sydney and Brisbane operations, walking the floor unnoticed to get a feel for what’s needed for taking on Star – and he’s seen it all before and reckons there’s an opportunity there.

But Kim lobbed his plan, he called an “alternative path” days after Australian casino mistakenly thought it had its near $1bn Salters financing deal in the bag.

And a re-energised board at Star sent Bally’s packing.

Star Entertainment chief executive Steve McCann. Picture: Max Mason-Hubers

Now with another cash crunch looming, Star has been forced to reopen the line with Kim. The thing is, both sides are in no position to strike a deal. Once dubbed as a “vulture capitalist” Kim could emerge lions share of Star’s hotel and casino assets for next to nothing.

However even as Star opens the line they need to remember Kim’s Bally’s is not flush with cash with problems mounting back home. This should raise alarm bells for Star’s board about who they are trying to paint as a white knight.

The New York-listed operator carries substantial debt and has a market value of less than $1bn. For measure before Star hit its regulatory woes it was worth around $4.5bn and in its most recent accounts, Star valued its property at more than $1.1bn.

Bally’s Chicago operation is ramping up in a crowded market and it too is feeling the pinch of higher state taxes. There’s a shortfall in funding for the construction costs to finish the Chicago project. Credit agency Fitch bumped Bally’s rating deeper into junk territory from B to B-minus this week citing concerns about Chicago.

Countdown clock

If Bally’s is Star’s first option, its second choice is even grimmer.

Without the funds it needs to stay alive not only for day to day expenses, but mounting regulatory hits, Star returns on the path it had been steadily heading from the late last year and that’s voluntary administration with FTI Consulting again on standby. This opens up a whole new set of possibilities for asset sales and puts in play Sydney, the well-regarded Gold Coast and Brisbane joint venture.

Star’s Hong Kong partners remain keen buyers of Brisbane’s Queen’s Wharf with Chow Tai Fook Enterprises and Far East Consortium are still working toward the buyout of Star’s 50 per cent stake in the newly opened Brisbane casino. Pokies king Bruce Mathieson remains interested in the Gold Coast.

The clock is fast ticking down for Star’s deal-maker boss Steve McCann to come up with a third option. This comes down to securing enough funds to give star the time to trade through its cash crunch.

However, the collapse of the Salter’s financing deal, which started at $750m, with an option to go up to $940m sends a pointed warning to other prospective lenders that doing business with Star really is difficult and fraught with regulatory risk.

Salters said as much in a statement. “After many months of work, it became apparent that we would not be able to achieve the necessary security arrangements that we had sought from TSEG (The Star Entertainment) within the relevant time frame”.

Bally’s Corp chairman Soo Kim. Picture: Getty Images.

While Star has been inching towards administration since last year, its demise would be no less shocking.

Indeed, coming in smack in the middle of an election campaign, it would have major political implications.

The Albanese government has rushed to bail out OneSteel throwing hundreds of millions at the steelmaker to protect 1000 workers. Star, which employs nearly 9000, is a key player in Queensland’s tourism industry and home state of Peter Dutton. There’s almost no political appetite to rescue Star, particularly at a state level. This suggests Star’s only shot at survival is to hope for another twist.

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Originally published as Two grim options ahead for Star Entertainment as funding falls through