Why a three-way split could be the final act for Star casino
Star’s board is trying to avoid the hidden rocks as the casino navigates safe harbour rules.
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Star Entertainment’s board has sought ongoing advice from restructuring specialist FTI to make sure it was acting within the guard rails of safe harbour rules as part of efforts to keep the casino out of administration.
If Star can find a way forward, it will mark one of the biggest tests for the safe harbour rules since the Covid-19 pandemic.
Rather than the strict test of the previous regime, the new rules give boards the room to trade out of trouble or secure fresh financing if that is the best option for Star’s investors, while also protecting creditors.
The question is, with such a long and competing list of potential creditors, whether safe harbour rules work in this situation.
This makes it a more complicated path for Star’s board – now led by former National Australia Bank general counsel Anne Ward – to navigate.
Leading the list of potential creditors is financial crimes regulator Austrac, which is in the final stages of negotiating a hefty fine against Star for money-laundering breaches mostly during the last decade. These talks and legal action have been going for almost two years.
Star’s shares were suspended by the ASX this week after the casino operator was unable to lodge its full-year results in time for the August 31 cut-off. Facing hefty writedowns, falling earnings and mounting regulatory bills, Star is scrambling to raise short-term funding. However, after four days, prospective investors are playing hardball.
It’s a precarious moment for Star. Its auditors are unable to sign off on the accounts until there is certainty over the latest dash for cash.
Casino regulator the NSW Independent Casino Commission has also left Star and its more than 8000 employees across two states in a deeply uncertain position.
The NICC elevated itself into politics over process when it chose to drop the findings of this year’s Bell inquiry just moments before Star was scheduled to release its full-year accounts last Friday.
The timing was no coincidence. The regulator had been quietly sitting on the report for more than a month and forced the casino into another tailspin. Adding more pressure onto Star, the NICC and its boss Philip Crawford has held off on a decision over what to do with Star, putting the casino into a fresh regulatory fog.
The Bell report could only identify four operational areas where Star was falling short. The inquiry’s head, Adam Bell, SC, recommended the casino be considered “presently unsuitable” to hold a casino licence.
The NICC has already extended the term of its hand-picked manager, Nick Weeks, until March next year.
And while it is unlikely Star will have its licence stripped entirely, the indefinite suspension only makes it harder for directors to promise that Star is a going concern. And with financial pressure mounting, this has only made it tougher.
Short-term funds
Without a doubt there are two big forces putting Star in this position. The first has been the NSW casino levy the previous state government got the ball rolling on. The Minns government agreed to scale this back, but it still could result in $800m in additional funds flowing to the state government over the next decade, depending on trading performance.
The other force has been the regulatory cat-and-mouse games played by NSW’s casino regulator. The ongoing regulatory disputes, mounting costs on the casino, and refusal to approve a remediation plan has clearly put Star on a much weaker strategic footing.
Star’s banker Barrenjoey has been briefing prospective investors, including offshore players, during the week over a convertible debt placement to raise as much as $300m.
During those briefings, investors have been told to prepare for a $1.2bn writedown on the value of property, particularly across its new Brisbane operation, as well as the steep downturn in trading conditions. This would punch a hole in Star’s already vulnerable balance sheet.
Any funds will help in the near term, but there are still several lumpy and potentially big payments to come.
The Austrac fine is expected to run into several hundreds of millions of dollars. Coming after that is another possible fine from the NSW casino regulator. Two years ago it issued a $100m fine and it is said to be gunning for another big number.
Then there’s a more than $220m completion payment for the new Brisbane casino. Adding to the risks are four ongoing investor class actions. Even if only one of these gets up legally, it could still be a big payout.
All this has collided with a sustained downturn in the casino operations, with punters staying away and a blowout in costs, mostly linked to increasing regulatory demands. Star is no longer the cash machine it once was.
Without the certainty of new funds, Star’s options rapidly diminish.
It is already on the verge of breaching debt covenants, meaning it is more than likely its bankers, led by Barclays and Westpac, will be ready to pull the mostly drawn down $450m syndicated debt facility.
Key is keeping $100m in minimum cash or liquid assets, and the other is having a minimum earnings to net interest cover ratio of 2.5 times. It is likely both will be tested in the full-year accounts.
Breaking up
If that happens, Star’s directors will have little choice but to waive the white flag. This triggers a new round of games.
Given Star faces hundreds of millions of dollars in regulatory fines and charges, it is unlikely anyone will have the appetite to buy the business whole. This means the best outcome for creditors would be Star becoming a three-way break-up option. And it’s a matter of who is allowed to bid.
The first leg to go would be the Pyrmont casino in Sydney. US asset giant Blackstone is already considered suitable by the NSW regulator and is said to still be keen on the Sydney casino as part of a way to build up its under-pressure Crown business in the same city.
Blackstone was open to talks, although went cool when a new inquiry into Star was announced earlier this year. Administration makes Star vastly more appealing because any fines remain with the head company rather than at the asset level.
Any deal comes as Blackstone is already significantly increasing its exposure in Australia. It’s on the verge of signing a monster $23bn buyout of data centre operator AirTrunk from Macquarie.
The second leg for Star is the easy one. Its biggest shareholder, pubs and pokies baron Bruce Mathieson, has been openly pushing for the newly refurbished Gold Coast casino. The rest would be too big a bite for Mathieson, although he has approval from gaming regulators in two states to increase his stake if he wishes.
Star’s third leg – Brisbane – will be the trickiest one.
The joint venture partners in Star’s $3.6bn Queens Wharf casino and property, Chow Tai Fook Enterprises and Far East Consortium, are thought to be best placed and most willing to take full control of the new operation. They have the funds to help the project trade through the critical first few years.
Although Queen’s Wharf has opened for business, there’s still more than $220m in construction costs for the completion of the project due in the coming year.
However, the two Hong Kong players will need to pass probity tests to control the casino. The Queensland government is closely following Star’s position with its preference to have the casino remain intact.
In one late twist, it is understood property developer Patrick Farrugia of HDI, who had previously run the now defunct Hard Rock Cafe on the Gold Coast, is still eyeing Star’s Sydney hotel towers.
His initial proposal was panned when it first emerged given the suggested then off again links to US entertainment major Hard Rock group. Farrugia is speaking to potential investors and if – a big if – he can pull together support, ironically he could be the one to provide an 11th-hour lifeline for Star to raise cash.
Meanwhile Austrac will be sure to have a say in any future break-up plan. It can only recover what’s left from the asset sales. It had initially been pushing for more than $400m in fines. Star is in no position to pay this amount in its current state.
One option being considered by Austrac could take the pressure off the casino’s board. This involves a smaller upfront payment that scales up if Star’s earnings hit certain milestones in coming years. Last in a long list of Star creditors will be class action lawyers with four separate cases lodged against the company. With little prospect of return under an administration, these will just as quickly fade away.
For Star’s board, even the safe harbour is still full of rocks.
eric.johnston@news.com.au
Originally published as Why a three-way split could be the final act for Star casino
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