STIMULUS FOR POTENTIAL BREACHERS

In “THE INDUSTRY THANKS YOU, MR.ENSIGN” (01/13/09), we highlighted the benefits that highly levered gaming companies may see coming their way as a result of a piece of legislation proposed by Nevada’s own Senator John Ensign. Ensign’s Senate Bill would have eliminated the negative tax ramifications of buying back discounted bonds. Unfortunately, SB33, due to a lack of sway on the part of the Republican Senator proposing it, has little chance of passing.

While not quite as attractive, a provision allowing companies to spread the tax bite of discounted buybacks over eight years is included in the stimulus package currently being wrangled in Congress. When all is said and done, it’s possible that some or all of the tax on bond buyback gains could be eliminated altogether. This provision would provide significant incentive for heavily leveraged companies to buy back their bonds. For example, a company buying back bonds at 60 cents on the dollar would de-lever by about 26 cents (40 cents less the tax bite). If the provision is in place, the company could defer that 14 cent tax.

This provision is almost written for the gaming sector. BYD, MGM, ISLE, and PNK all face potential leverage covenant breaches, but have ample liquidity to buy back discounted bonds. Less taxes = more de-levering.

Rory Green
Junior Analyst