Bankruptcies on the Horizon

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As the recession deepens and lingers, and the hospitality industry continues to suffer disproportionately to other segments of the economy, we're bound to see a growing number of bankruptcies in the coming months among hotel companies of all sizes.

Not surprisingly, one of the first is a Las Vegas operator, Herbst Gaming, which cashed in its chips this past Sunday through a prepackaged Chapter 11 filing. The company, which operates 15 casinos in Nevada, Iowa and Missouri, came to terms with its creditors over $847 million in debt. The company's casinos stay open under the plan.

More alarming is news that MGM Mirage is facing default on $7 billion in loans and the mounting concern over the company's ability to complete the $9.1-billion CityCenter project that's in the home stretch and due to open in December. Its joint-venture partner in that Strip project that combines hotels, casinos, residential and retail filed suit on Monday to be “relieved” on its obligations in the project. Infinity World, a subsidiary of Dubai World, says MGM breached its joint-venture agreement when it declared in a recent SEC filing that there is “substantial doubt” about its ability to continue as a going concern. That's a very dire scenario, one that MGM will undoubtedly have a tough time overcoming.

The company is not without options, however. One is to sell off some of its assets, a process that already started with the recent agreement to sell Treasure Island, one of its 10 Strip properties, for $775 million to Phil Ruffin, former owner of the Frontier. Analysts believe the company may also try to sell some vacant Strip land it owns or even a piece of the CityCenter project. Total failure of MGM Mirage would strike a serious blow to the reputation of other casino-hotel companies and all of Las Vegas.

A similar story is brewing in the traditional hotel segment. Atlanta-based Lodgian, owner and operator of 40 branded properties, is facing a $128-million loan that's coming due in July. Lodgian also admitted in a recent SEC filing that doubts exist about its ability to continue operating.

Unless there's a rapid turnaround in the health of the economy, these three examples are probably the tip of the iceberg. I'm guessing that at least a few household-name companies are in similar pickles and are scrambling to meet their debt obligations or to rework loan terms. Beyond that, there may be scores or more of mid-size or smaller owner and/or operator companies that may wind up in bankruptcy court this year or next.

And while this kind of news isn't good for the industry as a whole—and, of course, these companies in particular—it also creates numerous opportunities for well-capitalized companies, funds and individuals looking to do some bargain hunting.

No matter what, the hotel industry landscape will look completely different this time next year.

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