This excerpt taken from the FXRE 10-K filed Mar 31, 2009.
Certain prior period amounts have been reclassified to conform with current year presentation.
The Companys debt as of December 31, 2008 includes a mortgage loan on the Las Vegas property in the principal amount of $475 million (the Mortgage Loan). Prior to January 30, 2009, the Company used escrow accounts to fund future pre-development and other spending and interest on the Mortgage Loan. The balance in such escrow accounts as of December 31, 2008 was $29.8 million. On May 7, 2008, we delivered a notice to the lenders exercising our conditional right to extend the Mortgage Loans maturity date and effective July 6, 2008, we made an additional deposit of approximately $14.9 million into reserve accounts and extended the Mortgage Loans maturity date by six months to January 6, 2009. The Mortgage Loan includes certain financial and other maintenance covenants on the Las Vegas property site including limitations on indebtedness, liens, restricted payments, loan to value ratio, asset sales and related party transactions. The Company had purchased a cap to protect the one-month LIBOR rate at a maximum of 5.5%, which expired on July 23, 2008. Effective July 23, 2008, the Company purchased another cap to protect the one-month LIBOR rate at a maximum of 3.5% in conjunction with extending the Mortgage Loans maturity date to January 6, 2009 (as described below).
The Mortgage Loan is not guaranteed by FX Real Estate and Entertainment nor has FX Real Estate and Entertainment pledged any assets to secure the Mortgage Loan. The Mortgage Loan is secured only by first lien and second lien security interests in substantially all of the assets of the Metroflag entities, including the Las Vegas property. FXLR has provided a guarantee to the lenders only for losses caused under limited circumstances such as fraud or willful misconduct.
Mortgage Loan Default The Mortgage Loan contains covenants that regulate our incurrence of debt, disposition of property and capital expenditures. As of December 31, 2008, the Las Vegas subsidiaries were in default under the $475 million mortgage loan secured by the Las Vegas property by reason of being out of compliance with the loan-to-value value ratio covenants prescribed by the governing amended and restated credit agreements. On November 25, 2008, the Las Vegas subsidiaries obtained from their lenders a temporary waiver of noncompliance with the loan-to-value value ratio covenants set forth in the Amended and Restated Credit Agreements governing the outstanding $475 million mortgage loan. Under the terms of the waiver, the Las Vegas subsidiaries agreed to the first lien lenders (i) assuming control over the ability of the borrowers to convert between a Base Rate Loan and a Eurodollar Rate Loan, and (ii) obtaining sole and absolute discretion over the approval or disapproval of items submitted for reimbursement from borrowers Predevelopment Expense Reserve Account. In addition the borrowers agreed to pay an aggregate waiver fee to the first lien lenders of $580,519 and to pay all legal fees and expenses incurred by them in connection with the waiver. Because the Borrower Subsidiaries did not regain compliance with the loan-to-value value ratio covenants prior to expiration of the temporary waiver, an event of default occurred On January 5, 2009, the second lien lenders under the loan delivered a written demand for repayment of all of the obligations owed to them under the Loan, including the second lien principal amount of $195 million. The second lien lenders written demand, which was delivered prior to the Loan maturity date, cited the continuing covenant default referenced above.
On January 6, 2009, following the Las Vegas subsidiaries failure to repay the Loan at maturity, the first lien lenders under the Mortgage Loan delivered their demand for repayment of all of the obligations owed to them under the loan, including the first lien principal amount of $280 million. On January 30, 2009, the first lien lenders seized the cash collateral reserve accounts established under the Loan from which the Las Vegas subsidiaries had been drawing working capital funds to meet ordinary expenses, including operating the Las Vegas property, and applied $21 million of that amount to the outstanding principal under the first lien loan. In addition, the first lien lenders have directed all payments from the existing tenants on the Las Vegas property to be delivered directly to the lenders. Each month the Las Vegas subsidiaries may make a request of the lenders to access that amount of the revenue generated by the current rental operations that the Las Vegas subsidiaries deem necessary to meet the operating expenses related to the Las Vegas property. The lenders have sole discretion to approve or reject any such requests. Because the Las Vegas subsidiaries have limited cash available, if the lenders fail to approve the draw requests in full or in part or delay the processing, the Las Vegas subsidiaries will not be able to satisfy their obligations and pay for necessary expenses unless the Company is able to fund the shortfalls from other sources. The Company has limited cash available with which to provide any such funding.
At December 31, 2008, interest rates on the Mortgage Loan were at one-month LIBOR plus applicable margins of 50 basis points on the $250 million tranche; 300 basis points on the $30 million tranche; and 800 basis points on the $195 million tranche; the effective interest rates on each tranche at December 31, 2008 were 5.75%, 8.25% and 13.25%, respectively, including 2% default rate on each of the tranches which was effective since the Mortgage Loan went into default.
After the first lenders seized control of the cash collateral accounts, in accordance with the terms of the Intercreditor Agreement amongst the lenders, we cased making payment of interest and other fees and expenses to the second lien lenders. As a result of the Intercreditor Agreement, the second lien lenders are not entitled to commence an action or pursue any remedy until 120 days after the first lien lenders have received from the second lien lenders notice of acceleration and then only under certain circumstances, as set
forth in the such agreement. For example, if the first lien lenders pursue their remedies, then the second lien lenders remedies are stayed. As a result, no interest is currently being paid on the $195 million second lien loan.
Neither the Company nor the Las Vegas subsidiaries are able to repay the obligations outstanding under the mortgage loan.
As a result of the current global recession and financial crisis and based upon a valuation report obtained for the Las Vegas property from an independent appraisal firm combined with certain assumptions made by management, the Company recorded an impairment charge to land of $325.1 million. This charge reduced the carrying value of the Las Vegas property to its estimated fair value of $218.8 million which management believes to be reasonable. Though the Company believes the $218.8 million carrying value ascribed to the property is fair and reasonable based on current market conditions, the lack of recent comparable sales and the rapidly changing economic environment means that no assurance can be given that the value ascribed by the Company will prove to be accurate or even within a reasonable range of the actual sales price that would be received in the event the property is sold as a result of the loan default. A sale of the land by the Company or upon foreclosure by the lenders at or near the adjusted carrying value of $218.8 million would be insufficient to fully repay the outstanding mortgage loan and therefore would result in the Company receiving no net cash proceeds.
While the Las Vegas subsidiaries have engaged in preliminary discussions with the first lien lenders and the second lien lenders regarding potential solutions to the existing loan defaults, no agreement has yet been reached. To the extent that no consensual arrangement is reached and the lenders pursue their remedies, the Las Vegas subsidiaries may explore possible legal options in connection with trying to maintain their ownership of the Las Vegas property, including bankruptcy or similar filings. Whether or to what extent such action may be effective or viable is unclear.
Riv Loan On June 1, 2007, the Company obtained a $23 million loan from an affiliate of Credit Suisse (the Riv Loan), the proceeds of which were used to fund the Riviera transactions. The Riv Loan was repaid in full on March 15, 2008 with proceeds from the rights offering.
Bear Stearns Loan On September 26, 2007, the Company obtained a $7.7 million margin loan from Bear Stearns, which, along with the CKX loan (see note 5), was used to fund the exercise of the Riv Option to acquire an additional 573,775 shares of Riviera Holdings Corporations common stock at a price of $23 per share. In total, 992,069 of the Companys shares of Riviera common stock are pledged as collateral for the margin loan with Bear Stearns. The loan originally required maintenance margin equity of 40% of the shares market value and bears interest at LIBOR plus 100 basis points. As of December 31, 2008, the Company made payments of approximately $7.3 million to pay down the margin loan in conjunction with these loan requirements. On December 31, 2008, the effective interest rate on this loan was 2.33% and the amount outstanding, including accrued interest of $0.3 million, was $0.7 million. On November 3, 2008, the Company was advised that the margin requirement was raised to 50% and would be further raised to 75% on November 17, 2008, provided that if the price of a share of Riviera Holdings Corporation common stock fell below $3.00, the loan would need to be repaid. On November 11, 2008, the closing price of Riviera Holdings Corporations common stock fell below $3.00 per share, resulting in the requirement that the Company repay all amounts outstanding under the loan. From January 8, 2009 until January 23 2009, the Company sold 268,136 Riviera common shares and repaid all amounts outstanding under the margin loan. As of March 27, 2009, the Company had sold all but 115,558 of our Riviera shares.
Please see note 6 for a description of the CKX loan and other related party debt.