Deserted Blackjack Tables Showing Codere’s Hand: Distressed Debt

The deserted blackjack and roulette tables at Codere SA’s central Madrid gaming rooms, along with the 750-seat bingo hall that’s about three-quarters empty a floor below, testify to the challenge the company faces as it seeks to avoid insolvency.

“Queues of people used to stretch out onto the pavement,” Angela Perez, 76, said outside the casino on May 29, a Thursday night at 10:30 p.m. She said she’s been coming to play bingo for 20 years with her husband Miguel, 82. “It used to be so popular. With the crisis, people are spending less and there are about 60 percent fewer people here than seven years ago.”

Codere, which operates in Europe and Latin America and has posted nine consecutive quarters of losses totaling 365 million euros ($497 million), is in talks with creditors to restructure 1.1 billion euros of debt. An agreement to extend negotiations ends tomorrow as stakeholders seek to avoid bankruptcy proceedings that end in liquidation for 95 percent of companies.

For a business that counts on the luck of its customers running out, the manager of casinos, betting shops and racetracks has found good fortune in short supply since the start of Europe’s credit crisis. Recession and surging unemployment hurt its results in Spain and Italy, while an expansion into Latin America has been hampered by anti-money-laundering legislation to curb drug cartels in Mexico as well as currency controls and a smoking ban in Argentina.

Franco’s Death

The company’s bingo business is maintaining market share in a decreasing segment, while betting venues are increasing revenues in all areas where they’re established, Italo Durazzo, a spokesman for Codere in Madrid, said in an e-mailed response to questions. He declined to comment on the negotiations.

Codere was co-founded in 1980 by the Martinez Sampedro family in Madrid after the death of Spanish dictator Francisco Franco put an end to anti-gambling legislation. It sought preliminary creditor protection in January and lenders agreed on May 28 to extend negotiations for a sixth time to avoid a legal process known as concurso.

Bondholders include London-based M&G Investment Management Ltd. and Silver Point Capital LP in Greenwich, Connecticut, and they’re advised by Houlihan Lokey, according to two people familiar with the talks.

Bad Timing

The company’s luck soured after it doubled down in Mexico in January 2012, according to Chris Snow, an analyst at CreditSights Inc. in New York. It sold $300 million of bonds to help finance an increase in its stake in ICELA, owner of Mexican horse-racing track Hipodromo de las Americas, to 85 percent from 49 percent.

Codere also operated 89 gaming halls in the country in 2012, according to the company’s website, and the debt increase proved to be badly timed. Betting turnover slumped following a government crackdown after a gang-related shoot-out and arson attack in a casino, unrelated to the Spanish operator, exposed money-laundering links to the nation’s drug cartels.

“Just at the moment Codere took on peak financial risk is when the operations really came apart and the wheels came off the car,” said Snow. “From that point on, all their operations had headwinds. They have mismanaged it, but it’s also the case they’ve had bad luck.”

Gamblers now have to provide proof of identity, and that has deterred some high rollers, Angel Corzo Uceda, Codere’s chief financial officer, said on the company’s May 23 earnings call with investors. Losses in Mexico, Argentina and, to a lesser extent, Spain in the first three months of this year offset gains in Uruguay, Italy and Colombia, he said.

Net Loss

Codere reported a net loss of 28 million euros in the first quarter, compared with a 21 million-euro deficit in the same period a year ago, according to data compiled by Bloomberg. Revenue in the first three months of the year was 330 million euros compared with 391 million euros in the same period last year.

The gaming company had 1.5 billion euros of debt and a ratio of net debt to earnings before interest, tax, depreciation and amortization of 8.7 times at the end of March, up from seven times a year earlier, Bloomberg data show.

Its 660 million euros of 8.25 percent bonds rose to 58 percent of face value after it won more time to negotiate the debt restructuring deal, according to data compiled by Bloomberg. The notes were quoted as low as 37 cents in February.

Art Installation

Apart from declining earnings, the company suffers from a mismatch of revenue in Latin American currencies and debt denominated in euros and dollars. There are also laws preventing Codere repatriating profits from its Argentinian operations.

The Argentine peso is the worst performing among 31 currencies against the euro this year, falling 18 percent. Alberto Echegaray, a former adviser to the economy minister, last month debuted an art installation featuring shredded, out-of-circulation peso notes highlighting the currency’s drop.

“Codere has had a convergence of negative events, with both Argentina and Mexico combining with sluggishness in Europe,” said Wilbur Matthews, who oversees $100 million, including Codere bonds, as the chief executive officer at San Antonio-based Vaquero Global Investment LP. “They built a balance sheet that couldn’t carry itself through a trough in their business cycle.”

Codere’s debt is rated Caa3 by Moody’s Investors Service, its third-lowest ranking, and D by Standard & Poor’s.

Stakeholders are making “significant progress” in the debt negotiations, but cannot guarantee they will reach a consensual restructuring to avoid insolvency, Corzo said on the investor call.

Creditor Offer

“Shareholders and bondholders were a long way apart, but they’re still talking with a view to restructure and that’s a positive,” said Aengus McMahon, head of European high-yield research in London at ING Bank NV. “It’s not a bad business; it’s a stressed balance sheet.”

The Martinez Sampedro family became majority owners in 2006 when they purchased the stakes of fellow founders, the Franco brothers.

In the company’s offer to creditors in May, bondholders would get 70 percent of the company’s equity while shareholders would hold 30 percent, according to a filing. Noteholders want an 82.5 percent stake in the company, offering 14.3 percent to Chief Executive Officer Jose Antonio Martinez Sampedro and family members and 3.2 percent to other shareholders, according to the statement.

“The market is increasingly pricing in the likelihood that some positive agreement will be found,” said Amit Staub, a portfolio manager at ECM Asset Management Ltd. in London, which oversees $8.2 billion. “It’s in the interest of all parties to strike an agreement.”

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