This is a good explanation of why Friday's series of deals is a good option given the alternative.
Inside the mission to rescue Star casino from the brink and make a clean break from Brisbane
For Star to survive, it would have to cauterise its biggest financial wound that was bleeding the balance sheet dry. And that meant, once and for all, drawing a line under the ambitious project that promised to put it in the casino big league: Brisbane’s Queen’s Wharf.
Project Antares, named after one of the brightest stars visible in the sky during the winter months, was the radical plan that Star chief Steve McCann and his investment bank UBS had been quietly working on in recent months even as the stricken casino operator had been fast running out of cash – and options.
A three-way international rescue deal finally fell into place on Friday night – effectively a minute to midnight in Star’s life. Each part of the plan relied on a sequence of events.
The finer details still need to be ironed out, but Antares gives Star a fighting chance to recover and even one day find a path back to growth, although as a much smaller business. It went right down to the wire.
Had Star not secured $35m cash on Friday night from a complex asset swap with its Hong Kong partners, it would have run out of funds as early as Monday. Now it has the cash and commitment of nearly $1bn in fresh loans.
Avoiding disaster
The collapse of Star would have been one of Australia’s biggest administration jobs. It would have led to a very different week for nearly 9000 employees as well as thousands of suppliers. The appointment of administrators FTI Consulting would have kicked off a drawn out sales process and a likely carve-up of Star.
Equity investors would be wiped out, while a revenue stream for two state governments most certainly faced a hit. Tourism too was set to suffer a blow. All this has been avoided.
In the view of McCann, a former Lendlease and Crown Resorts boss, Star’s massive Brisbane development was going to struggle to be viable for years.
Indeed the cost of the mega-project now risks blowing out to between $4bn and $5bn from an initial budget of $2.6bn, with Star and its tiny balance sheet the 50 per cent partner.
More immediately, Star was on the hook for $212m in additional equity payments from the end of this month – cash it simply didn’t have. There was no way Star’s directors could sign off on the accounts at the end of last month.
McCann viewed Star’s Hong Kong partners – the diversified property major Chow Tai Fook and the smaller tourism operator Far East Consortium – as the natural owners and talks formally began in December, including a meeting in Brisbane in January.
On Friday they reached agreement to take ownership of the entire Queen’s Wharf project. Although to bypass an uncertain and long state probity process they kept Star on to operate the casino and hold the Brisbane gaming licence, paying the Australian casino $5m a month.In a sage full of twists there’s more to follow. Early Monday US casino major Bally lobbed a rival proposal to inject $250m into Star, in a debt to equity proposal that will see it emerge with 50.1 per cent of the Australian casino.
Why Queens Wharf had to go
The business case for the sprawling Brisbane hotel and casino was developed pre-Covid and before a regulatory crackdown on the international high roller trade, as well as tougher gaming rules including a shift to cashless. These things have fundamentally undercut the casino business model.
The performance of the new Brisbane casino since opening last year has been worse than even the low expectations set at the time.
In January, in what should have been its busiest month, Queen’s Wharf casino barely generated $1m in earnings and that was before the massive interest bill.
Star had already sunk more than $1bn into Queen’s Wharf, but it had written down the value of the project to zero.
It still represented a big financial hole in Star’s balance sheet, and the sales and asset swap deal entered into on Friday stops many hundreds of millions that Star doesn’t have racing out the door.“There was no sensible scenario around this,” said one person familiar with Star’s boardroom talks of recent weeks.“This property will drag the rest of Star under. Exiting the liability was not only a good idea – it was a must-have.”Importantly, the exit removes Star’s biggest survival threat, which had been a $1.4bn looming refinancing of its share of the debt in Queen’s Street wharf at the end of this year.Given the poor performance of the Brisbane casino to date, Star was facing the prospect of pumping in several hundred million more equity on the loan to bring the leverage on the debt down.Simply, the cashflow coming out of Queen’s Wharf couldn’t support the weight of the debt. Under the asset swap, the Flagstaff-advised Hong Kong partners take on the entire financial exposure. They have deeper pockets for a longer-term turnaround.
While Star has walked away from Brisbane in full, including transferring older Treasury hotel and stakes in two car parks for just $53m, the deal means Star avoids future cash calls. There is one potential for surprise – if Queen’s Wharf performs better than anyone expects Star is in line for a $220m earn-out payment in five years, but McCann has put such a small chance of that happening it hasn’t been included in any financial projections.
Loan structure
The other two legs of the deal were just as critical for Star’s survival. The first is the $250m bridging loan from US hedge fund and specialist asset manager King Street Capital. Star pays top dollar for the interest on this loan but the funds are as good as approved.The talks with King Street have been underway since before Christmas, which means it has already done intensive due diligence on Star.The third leg to the rescue plan is finalising talks with an unnamed offshore lender for a $750m five-year loan. This is designed to pay out Star’s frustrated banking consortium in full. Talks have simultaneously been happening on this since before Christmas, with a non-binding offer finally landing on Friday.
Diligence is expected to be finalised within next three weeks and unlike other funding offers it is not conditional on the NSW or Queensland government offering tax deferrals. When Star’s board gets the commitment of a binding funding agreement it should be in a position to sign off on the accounts and resume trading again.A rival offer from US hedge fund Oaktree to buy out Star’s banking consortium offered $650m and Star’s lenders would have had to take a haircut on their debt.
A smaller Star?
McCann, who only took charge mid-last year, and his bankers certainly engineered a miracle corporate escape, the likes of which haven’t been seen in Australia for some time.Without Brisbane, Star will be a much smaller casino. It gets to consolidate its position on the newly-redeveloped but profitable Gold Coast casino and takes full ownership of two up-market hotels. Unlike Brisbane, the Gold Coast is built more around a stable domestic tourism market.
The asset swap also gives Star more than six hectares of prime Gold Coast real estate where it has an option to build more towers down the track. McCann is already considering options, although they will need to be funded. It eliminates the cash flow drain from Brisbane and retains at least some value for investors when the shares eventually resume trading later this month.
The calculation by McCann was that by eliminating any downside from Brisbane this was far more valuable than any longer term financial upside – even if Star had found a way to hang on.
Star is not fully out of the woods yet but for the first time in more than two years it can see a way forward. It still needs to lock in the bridging loan and the lending facility, but there is conviction inside the board on this.It still faces a likely hit from money laundering regulator Austrac and its casino licence remains suspended in NSW and conditional in Queensland. Now with financing mostly in place, Star can go about the necessary business of rebuilding its governance.The shift to cashless gaming has hammered Star’s business model but McCann is confident the market will settle over time.The partial carve-up and a sale under financial stress is not a good outcome for investors who have funded Star through its woes with multiple capital raisings. But they still emerge with something, and in the Gold Coast a stronger casino business.
It’s a survival plan, which it didn’t have last week.
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