Plan to redevelop Sahara risky for investors, debt-rating agency says

/ Las Vegas Sun

The Sahara porte cochere and marquee are seen Monday, December 21, 2009.

Sahara's Last 24 Hours

Sunday, May 15, 2011 at 8:02 p.m. - The Sahara marquee is seen as the sun sets on the last evening that the casino is open. Launch slideshow »

Sam Nazarian’s plan to redevelop and reopen the Sahara hotel-casino is risky for investors in the project’s debt, Standard & Poor’s is cautioning.

The debt-rating agency in New York on Thursday issued a preliminary B- rating to a proposed $300 million term loan for the $744 million project dubbed SLS Las Vegas that would open in the second quarter of 2014.

Nazarian’s company isn’t commenting on recent ratings actions for the proposed project, a spokesman said Thursday.

Like a rating issued earlier by Moody’s Investors Service, the S&P B- rating is deep in speculative or “junk” territory.

But while Moody’s outlook on the proposed $300 million loan debt is stable, Standard & Poor’s gave it a negative outlook.

That could drive up Nazarian’s borrowing costs, because the negative outlook implies more risk for lenders and investors.

“Given SLS’ disadvantaged Northern Strip location, a highly-competitive market with many well-established competitors and the vulnerability of new gaming projects to uncertain demand and difficulties managing initial costs, the negative outlook reflects the risks in achieving a sufficient ramp up in EBITDA to meet fixed charges,” S&P analysts wrote in their report.

EBITDA is a profitability measure meaning earnings before interest, taxes, depreciation and amortization.

The budget-oriented Sahara closed May 16 after 59 year of operations, with Nazarian saying it had grown uncompetitive.

Now, he’s hoping to reopen it as a luxury or near-luxury property without its roller coaster and with 1,622 rooms, down from the 1,720 rooms the property had when it closed.

Standard & Poor’s, in its report, revealed more details about SLS that confirm it would be as much about dining and nightlife as about gambling. This is no surprise, given Nazarian’s ownership of the Los Angeles-based SBE Entertainment hotel, restaurant and nightclub company.

S&P said the property would have 12 restaurants seating 1,671 people, 8,000 square feet of bars and lounges and four nightlife venues with a capacity for 5,000 people.

Observers are wondering whether such a concept will work at the Sahara location, given its lack of foot traffic and remoteness from the hottest parts of the Strip, the idled status of the nearby Fontainebleau and Echelon resort projects, the debt default at the nearby Las Vegas Hilton and the inability — so far — of the Cosmopolitan resort to make money with its dining and entertainment orientation.

Still, with business picking up on the Las Vegas Strip, both Standard & Poor’s and Moody’s agree the market could absorb another 1,622 hotel rooms. What they’re questioning is whether the Sahara is the right location for those rooms.

They’re also questioning if Nazarian will have an adequate capital structure to meet debt obligations that include the $300 million loan plus $115 million in junior financing. The debt is on top of $329 million in equity contributed or to be contributed by Nazarian and his partner, a Stockbridge real estate fund.

S&P, in its report, called the SLS business risk profile “vulnerable” and said it’s “highly leveraged.”

Standard & Poor’s said that with its nightlife offerings, SLS could fetch high weekend hotel room rates of $130-$140 but that it would have to substantially lower midweek room rates given its disadvantaged location and limited convention capacity.



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Discussion 3 comments

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  1. It needs to be considered the ratings given at this point are preliminary. People (like Nazarian) pursue such ratings early so they can do what is necessary to raise them before actually getting the financing. Though the article approaches the issue from a negative stance, it's just as likely the status of potential finances can be raised by .5 to 1 grade points by acting on information gained during the preliminary process.

  2. UTE is correct that Nazarian may adjust the Sahara capital structure in hopes of gaining better debt terms.

    As for his "negative stance'' commentary, the same could have been said about a story we ran in 2009 on Standard & Poor's warning of a debt default at Fontainebleau Las Vegas

    A few months later, of course, Fontainebleau was shut down and bankrupt.

    This doesn't suggest the same fate awaits the Sahara.

    It does show, however, why ratings matter. It also shows why, when a debt rater issues a ''negative'' or ''positive'' outlook, we usually highlight that point.

  3. Having been a former business owner, I am all for entrepreneurship. Does the city need one more steakhouse? You betcha - if you can do something to separate yourself from the rest. One more casino? Can you offer something different in your joint to make me want to play there? The "D" will have dancing dealers. Hardly new and innovative, but if I am walking Fremont Street, I'm sure going to stop in there and check it out.

    How about a new adventure attraction that we are not allowed to call a Ferris Wheel? Awesome!! (Really.) I've been on the London Eye, and it was worth every penny and every minute in line. So do we need 2 (not) wheels? Not really, but they will both do well because their different locations make then 2 different adventures. I am in my mid 60's and a 20 year resident of LV, but I can't wait to do both.

    Another set of nightclubs at the Sahara? Sorry - no. I would not bet 20 cents to make a dollar on this one. There are countless nightclubs all up and down the strip that are struggling for the same buck. And in prime locations.. In a soaring economy, a weak location can crawl to make ends meet - in any business. But in this horrendous economy - which has no end in sight - a lousy location is a guarantee of failure.

    Casinos up and down the strip are laying off workers and demoting full time dealers to extra board. How is this the right time to spend hundreds of millions on a venture with a proven horrible location, especially when it involves spraying perfume on a corpse?