11/25/2009 12:00AM

Magna bankruptcy in a holding pattern

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Plans by Magna Entertainment Corp. to reorganize and emerge from bankruptcy are increasingly hinging on whether a judge will allow its parent company to use hundreds of millions of dollars of Magna's debt as credit to bid on its racetracks, according to officials involved in the bankruptcy process.

Magna owes the parent company, MI Developments, approximately $435 million, making MI Developments the largest creditor in the bankruptcy court. Both companies are controlled by Frank Stronach, the owner-breeder who founded Magna Entertainment after engineering the purchase of Santa Anita Park in 1998 through publicly traded companies he controlled.

The vast majority of the debt held by MI Developments, approximately $371 million, is considered secured debt, putting the company first in line to receive proceeds from Magna's asset sales. However, the unsecured creditors' committee of Magna has filed a lawsuit against MI Developments claiming that the debt should be considered lower priority, or unsecured. The committee claims that officers for both companies were aware at the time MI Developments provided the loans that Magna would file for bankruptcy if its financial condition did not substantially improve. As a result, the lawsuit contends, Stronach could use his control of both companies "to set up a 'heads I win, tails you lose' financial model."

"Either [Magna] would improve its performance, in which case MID and its shareholders would profit, or [Magna] would file for bankruptcy, in which case MID - through credit bids - would retain [Magna's] most coveted assets," the suit contends.

Judge Mary Walrath, who is presiding over the reorganization, ruled that the lawsuit can go forward, and a trial is scheduled to begin Jan. 11. If the unsecured creditors committee prevails, Magna will be under enormous pressure to reach cash deals to sell its remaining tracks at prices well below what it paid for the properties, according to officials at the company, and MI Developments will be unable to act as a backdrop to bid on tracks that Stronach is reluctant to sell, such as Santa Anita Park and Gulfstream Park.

"If the judge rules for the unsecured creditors committee, everything changes," said one official who is involved in the bankruptcy planning.

In total, Magna owes its creditors approximately $800 million. In addition to the $435 million in debt held by MI Developments, another $110 million is held by secured creditors such as banks. The unsecured debt is approximately $250 million, mostly from a $225 million bond issue.

Magna's plans are to sell its racetracks to the highest bidders and retire all the debt. Those plans could include swapping the debt owed to MID for racetracks if the judge were to dismiss the unsecured creditors' suit, according to two officials who are working with Magna on its bankruptcy reorganization.

Typically in bankruptcy cases, companies attempt to negotiate with creditors to forgive or restructure debt in addition to paying down the principal. However, Magna is unlikely to be able to reach any agreements with its creditors on debt restructuring, one of the officials said.

"It's not clear that any of these properties generate enough cash to support any debt at all," the official said. "We need a pile of cash."

Magna has already reached deals to sell Remington Park in Oklahoma for $82 million and the operating assets of Lone Star Park in Texas for $47.9 million. The company had also reached a deal to sell Thistledown racetrack in Ohio for as much as $87 million, but that deal is unlikely to close because of provisions in the sales agreement allowing the buyer, Harrah's Entertainment, to back out of the deal if the legality of casino-type gambling was expanded beyond racetracks in the state. Those clauses were triggered when Ohio voters approved casinos in four cities in November.

In financial documents filed with the SEC earlier this month, MI Developments indicated it still plans to bid on Magna's Santa Anita Park, Gulfstream Park, Golden Gate Fields, Laurel Park, and Pimlico Racecourse despite objections from shareholders and the creditors' committee suit. The tracks it listed are Magna's most valuable properties, based on the prices Magna paid for the tracks and real-estate considerations. However, because it's unclear how valuable the tracks are as ongoing businesses - in which a buyer would be able to use the tracks to generate significant profits - it's also unclear whether any bidders would be able to match the value that MI Developments would assign to the tracks as a swap for its debt.

Although one Magna official said none of the tracks is "hemorrhaging money," he also said "the bulk of the assets are break-even."

Members of the unsecured creditors committee declined to comment, and legal counsel for the group did not return phone calls.

In California, the Thoroughbred Owners of California has been attempting to put together a non-profit partnership to buy Santa Anita, but so far the group has not raised enough funds to match the amount of debt that MID would swap for the track, according to a Magna official. No serious bidders have emerged yet for Golden Gate near San Francisco, the official said.

In Maryland, real-estate developers have indicated an interest in the Maryland Jockey Club's two properties, but Magna officials said two weeks ago that they would not accept a stalking-horse bid from an unidentified company. Instead, Magna plans to accept bids for the two tracks up until a Dec. 6 deadline, according to officials. The company also seeks a partnership that would allow Stronach to retain some control over Pimlico, where the second leg of the Triple Crown, the Preakness, is held.

In Florida, Gulfstream Park continues to struggle despite the addition of a slot-machine casino and the passage of legislation favoring the racing industry that reduced the amount of money tracks have to pay to the state from slot-machine revenues. Florida remains a competitive gambling market, and so far bidders have been reluctant to come forward for the track, Magna officials said.

From Magna's point of view, then, its best strategy might be to let MI Developments take control of its marquee tracks through the debt swap, since any prices it might get for the remaining tracks from outside bidders will be well below the value that MI Developments would be willing to assign to the properties. On the other hand, the creditors want cash, and the best way for them would be to prohibit MI Developments from emerging as that best bidder. So, until Jan. 11, don't look for Magna to strike many deals, but expect a flurry of them after that date.