Published: Wednesday, November 22, 1995
Byline: By TYLER BRIDGES and MIKE HUGHLETT Staff writers
Executives of Harrah's New Orleans Casino have decided to file for bankruptcy and were
to close the company's money losing temporary casino before dawn today, a casino board
official said he was told late Tuesday night.
It was unclear how long the scheduled 4 a.m. closure, which would throw about 2,000 people out of work, would last.
Max Chastain, chairman of the state casino commission, said he also expects construction on the permanent casino to stop.
One of the three partners in Harrah's New Orleans - the group of nine New Orleans businessmen known as Jazzville - filed Chapter 11 bankruptcy late Tuesday night, a Harrah's New Orleans source said.
And Harrah's New Orleans itself will also seek Chapter 11 protection.
Chapter 11 allows a company to financially reorganize while shielded from the claims of its creditors and litigation. Companies in Chapter 11 generally stay open..
The decision to close the temporary casino came after Harrah's lead bank, Bankers Trust, froze money for the construction project, Chastain said. This prompted a series of closed-door meetings with the company's local partnersHarrah's Entertainment Corp., Jazzville and Christopher Hemmeter's Grand Palais Inc.that led to the late-night decision.
Harrah's is expected to seek reductions in payments to its lenders and reductions in state and local taxes. A reduction in taxes would require action by the state Legislature and the New Orleans City Council.
It is unclear what impact Harrah's decisions will have on plans to open the permanent casino next summer on the former site of the Rivergate. Bankers Trust's action was prompted by new financial projections by Harrah's for the permanent casino, said a source close to the situation who declined to be named.
The new projections were drawn up in response to dismal business at the temporary casino. The new forecast is significantly lower than the $617 million forecast by Harrah's last year, according to reports with the federal Securities and Exchange Commission.
Based on the new forecast, Bankers Trust decided that Harrah's would still be able to make the interest payments on the $600 million mountain of debt being used to finance the casino, the source said.
But Banker's Trust decided Harrah's margin of error would be far thinner, so it froze a $170 million bank loan to Harrah's, the source said. Harrah's doesn't immediately need that money; it's still using its first cash source, more than $400 million in junk bond proceeds, to build the permanent casino.
But Bankers Trust's action apparently initiated a crisis of confidence.
Plus, Bankers Trust is the trustee for the bond money, meaning it controls the disbursements of bond proceeds. And the source said Bankers Trust has held up payment of bond money to construction contractors in recent days.
Harrah's New Orleans has been doing so poorly that it acknowledged it will likely borrow money from its lead partner, Harrah's Entertainment, to finish the permanent casino and keep the temporary casino running.
Meanwhile, tensions have risen again between Harrah's Entertainment and Jazzville.
Memphis, Tenn.-based Harrah's Entertainment loaned the New Orleans casino $17.8 million to help keep it afloat through Oct. 31, according to a quarterly report filed with the federal Securities and Exchange Commission.
That $17.8 million helped Harrah's New Orleans meet payroll and other employee-related costs.
The casino, which opened May 1, hasn't been able to generate enough revenue to even cover its operating expenses.
It took in $41.2 million for the three months ending Sept. 30. But its operating costsexcluding depreciation, interest and management feeswere $45.5 million.
The problem: The temporary casino hasn't drawn nearly as many tourists and suburbanite gamblers as Harrah's had anticipated.
Harrah's had forecast average revenue of $33 million per month or $396 million for the temporary casino, which is expected to be open one year. The reality: average monthly revenue of only $13.1 million through October.
Harrah's New Orleans is "reevaluating its financial forecasts" for both the permanent and temporary casinos, the Harrah's quarterly report said. The new projections should be "significantly less" than the original forecasts.
Harrah's had expected the permanent casino, which will be one of the world's largest, to generate $618 million during its first year.
By revising its forecast, Harrah's will join a crowd of stock and bond analysts who have already lowered their expectations, including:
Merrill Lynch junk bond analyst Richard Byrne, who's estimated permanent casino revenue of $472 million.
Salomon Brothers stock analysts Scott Renner and Bruce Turner, who've forecast $445 million.
Oppenheimer & Co. stock analyst Dave Wolfe, who projects $330 million.
Meanwhile, casino board chairman Chastain, in a confidential memo to board members Monday, said the group of investors known as Jazzville told him that Harrah's and Jazzville have broken off negotiations over the percentage of Jazzville's share in the casino. This means that the two partners could be headed toward a nasty court battle.
Jazzville originally had been a one-third partner with Harrah's and Christopher Hemmeter's Grand Palais Inc. But Jazzville's share dropped to 13.7 percent when the nine partners could not come up with another $33.3 million last year demanded by Harrah's. Jazzville and Harrah's had been in sharp disagreement over what Jazzville had to do to regain 14 percent of its ownership, but two months ago announced that they had averted a court battle and patched things up..
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